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K3 Business Technology - a most disappointing profits warning but hang on

By Tom Winnifrith & Steve Moore | Thursday 12 January 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Having been tipped at a 148p offer price at the start of 2013, shares in K3 Business Technology (KBT) have more recently exceeded 350p. However, they are currently back to circa 240p following a disappointing“Trading update” announcement.

In particular this includes that;

“Trading in December, a key selling period, has not been as strong as expected, reflecting a softening in market conditions. Given the lengthening sales cycles around larger deals and the accelerating industry shift to cloud-based consumption, management now believes it prudent to expect that EBITDA (pre-exceptional items) for the full year will be approximately £3.5m less than the originally anticipated.”

However, the statement also reckons that “the board views K3's prospects positively, supported by the pipeline of opportunities and the benefits expected to flow from the reorganisation”. This “operational reorganisation”is noted to be “largely complete”, with exceptional costs expected to amount to approximately £3 million, though with annualised future benefit likely to exceed £3 million.

The net result is year to 30th June 2017 earnings per share expectations reduced from more than 26p to circa 18p, rising towards 23p next year. These suggest the shares still good value, but the update creates doubt on management’s ability to deliver these broker numbers.

Half year results are intended to be issued towards the end of March and we’re prepared to stick with this ahead of a further update with those and the more detailed review they will enable for if new forecasts are met the shares look to offer upside of 50% without a doubt. But it is an IF so for now, hold.

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