Small Cap Focus: Second half boost for K3

LONDON (SHARECAST) - Enterprise software company K3 Business Technology had a tough first half but the second half looks set to be much better. Strong recurring revenues mean that the enterprise software provider should generate £4m in cash this year.

Revenues fell from £17.1m to £15.9m in the six months to June 2009 and this led to a slump in profit from £908,000 to £131,000. Stripping out amortisation the fall in profits was from £1.66m to £943,000. Both the retail and manufacturing software divisions made lower contributions. The Netherlands business, which is dependent on IKEA, had a poor first half.

There were bright spots. The UK retail software business improved its profits and margins helped by £2m of new contracts. On the manufacturing side, the managed services business is growing and the SYSPRO manufacturing software operations continue to win clients.

Although K3 predominantly sells Microsoft and SYSPRO software it also develops its own IP around these products. This will help generate additional revenues. K3 could even sell its own software to other SYSPRO and Microsoft resellers.

Net debt was £13.5m at the end of June 2009. The first half is always poor in terms of cash flow but the second half is helped by £6m of SYSPRO licences payable in October. Whereas other software licence revenue is spread across the year, SYSPRO licences are all payable in October. This means that the year end cash position is always strong. Net debt could be down to £9m by the end of 2009.

The lower borrowings and interest rates will mean that interest costs will be much lower in the second half. On top of that there are £650,000 of cost savings coming through since June. Consolidating offices will bring more cost savings next year.

The order book is also improving and these new orders should contribute in the second half.

House broker Daniel Stewart expects flat 2009 pre-amortisation profits of £6m - a positive achievement considering the poor first half.

At 85p a share, K3 is valued at £20.2m. That equates to prospective multiple of less than five. An unchanged final dividend of 0.5p a share gives a yield of 0.6%.

The shares are lowly rated for such a cash generative business. There is also scope to acquire legacy software businesses that could enhance earnings and provide potential customers for K3's software.