K3 Capital Share Discussion Threads

[its the oxman] 29/3/2019 12:05

Starting to feel like someone knows figures will disappoint.

[i love chicken] 29/3/2019 07:59

When is the next trading update here?

[pireric] 20/3/2019 20:21

Thx very much Simba. It's always possible, sure. But the volumes are just so thin recently, all it takes is for one institution to want to reduce in a pool of less buying activity and you get such drifts. There was a similar situation with SDI.L a few months ago when it was sub 35p and I couldn't really understand it at all. Other examples inc the likes of GYM group recently. Where the accounts are clean, I have less of a concern.

Other times, it can be a precursor, I admit, but tends in my opinion to be for more liquid and larger stocks where there are more active institutional investors. When you get down sub £150m, it can be really tricky for them to trade in and out, and so it's very much a case of whether they want to own the stock for 3 - 5+ years or not. Have zero expectation that any retail investors, myself included, really have any proper read into how the company is performing on a day to day basis! (which is pretty much what these drops are).

So I'm pretty comfortable for now. As I say, I think the downside even if they miss slightly in 2H and only mirror what they delivered in 1H (which included very few big deals), then the downside here is actually pretty limited, versus the upside anyway. So not too fussed truth be told!

Haven't done any DCF work yet, but imagine it would be highly favourable. Big qs on what happens to margins etc long term, but theoretically, almost like a RMV, those margins are pretty defensive and the result of significant operating leverage. I imagine it would point to a target price north of 300p given the FCF yield here is 7.4%

[simba_] 20/3/2019 20:13

I hope I'm wrong, Eric. For your sake. But this price action to me suggests a possible profit warning..Ive seen this before where price just trends down over a period of months on a business with excellent fundamentals and it seems a slam dunk buy then it becomes clear..I hope thats not the case here coz I know youre a genuine guy. It remains on my watchlist for the time being but wish you atb. Have you done any DCF work here?

[pireric] 17/3/2019 08:53

Hi Simba,

In terms of downside, I like to look to both the EPS and multiple component. If the big deals don't come through in H2 for whatever reason, I think we could be looking at maybe a 10% fY downgrade, so lets say 11.5p of EPS. What multiple does the market attach to that? I struggle to think its less than 14x unless the market becomes really really bearish on prospects, which is harsh given its just one business unit, that is known to be lumpy. The other two are growing very strongly. That points to potential downside to 11.5p * 14x = 161p = -20%. And that pretty much assumes that the market considers this ex-growth when they only have a low single digit market share and are expanding into their 'triple track' activities, and look at their growth track record the last few years. They just have a really tough 2018 comparison to grow off.

On the other hand, if this is purely a blip, they get their mojo back on, I'd like to think they could end up with 14-15p of EPS next year (not this year) minimum, and at a 20-25x multiple ), that's 14.5p * 22.5x = 325p = + 60%. And bearing in mind, if they hit their numbers this year, you're getting a mid single digit dividend yield before any future growth. That's how I think about the risk reward. I don't feel either scenario is impossible, but it's a very nice upside downside ratio of 3x and I'm not sure the downside case would be long-lived.

There's not any real direct marketing peers like these guys that I know of. There may be some overseas. The market may be semi concerned that the likes of Panmure Gordon (When they were listed, Cenkos etc.) are all highly cyclical. Basically, you'd end up every 3rd year thinking its cheap but because of high fixed cost of staff, and low deal pipe, they would post really weak results. But the business model is very different, highly scalable, the number of transactions completed is a whole different scale, high gearing, low fixed costs, fixed costs covered by non-contingent fees. Understanding the differences was one thing I spent quite a long time on pre buying recently as was wary it could just be another "profit one year, loss next year" business. I think the market has just overreacted to the H1 results being slightly down y/y, and also Naked Trader, a well followed trader, selling out of a recent position after the trend broke down. Both, IMO transitory factors.

Hardman attended their post H1 results meeting and penned these short notes



I agree on the PE, was trying to illustrate that, if the market re-believes in the forecasts, then a major component on upside will be multiple expansion again. Very few companies with these metrics. Since it's more helpful, and I think it illustrates my point, here's a time series of the PE ratio, 1 year forward. I'm a fan of mean reversion, and the very first few months when it was at a low teen ratio was pre the growth story was really well understood. So think it also broadly supports the downside multiple not being significantly lower than here.



Also may not be a trading update if they are in line with expectations, which I think would be considered a good thing.

No idea on the macro. The market has completely shrugged off the December decline, and in very broad based style (pretty much everything has been bought). China have massive stimulus, which should help Europe, and the US is fine. So think we're OK again for now, which supports a steady market. The one thing I'm wary of is Brexit. Not from an economic standpoint, but the GBP. If the can gets kicked way down the road, then a return to 1.40 spot USD to GBP isn't crazy IMO, which is a pretty big headwind for UK exporters. So preferring domestics without that currency risk, and K3C kind of fits that bill.

[simba_] 17/3/2019 08:08

Hi, Pireic.

Agree on excellent financial metrics but importantly, for some reason the market is overlooking this. Price action since the highs last year is concerning, its dropped 50% on what seems like all good news (until Jan). This could almost half again if they dont hit forecasts. I'm thinking this price action is macro driven and the concern is that this sector will be hit hard in any slowdown. Do you know of any sector peers to look at sentiment/outlook there?

Also agree that it now looks like peoples worse fears on Brexit have been avoided. Likely to be a longer delay there now so this 'should' see the problems around uncertainty ease a bit.

The PE dropping from 30 to 15x doesn't tell me much. It could just be that it was way overvalued at 30. And theres not enough data to check historically what it trades around (on sharepad). I would like to check any peers on this as well.

I'm not sure yet on this. As i say, it's a dilemma for me. On one hand it seems like a screaming buy but on the other, I cant ignore price action which is still in a downtrend. I'll probably wait on an update (this month?). Realise that I will miss a chunk of any rise but preserving capital is key for me just now.

curious if you have any macro views?. Thanks

[pireric] 16/3/2019 09:55

H1 had revenues slightly down y/y Simba. KBS and Knightbridge showed very strong growth, but KBS Corp Finance, the one that deals with the large transactions, was behind last year

Mgmt are very confident it's phasing and that those will come through in due course. Importantly, for me, estimates for this year have not shifted post H1. The weaker H1 was well flagged in Finncap's estimates.

It's very cheap if they hit their forecasts. The way I think about it is more medium term, as I think you have to be with the current state of play. If the deals conclude and go through, it could easily +25%. If they don't and we get a 10% downgrade to EPS for the year, you might get a smidge more downside in a slightly more compressed multiple (say -15%), but then do you believe the growth story? I do, as they're firing on most cylinders, so I'd buy the dip anyway, and I could easily see a return to these levels. It's phasing and timing and I'm sure Brexit hasn't helped. With hard Brexit seemingly closer to being ruled out, I think that's people's worst fears seemingly out of the way (barring some U-turn).

I like the risk reward here a lot, given the multiple has compressed from over 30x to 15.5x. Not sure, even if they miss because of phasing, that that number moves down much further. Whereas, springboard risk to the upside is more significant (as management have tended to be conservative), you get the EPS number and then uplift in the multiple again.

At the end of the day, it'll probably grow strongly on a 2 year basis, and has excellent financial metrics.

[simba_] 16/3/2019 09:31

Ive been looking at this recently. Tough comparatives but dont understand why consesus forecasts are so dire. 0.7% turnover growth?. 5.8% decrease in EPS?. (Sharepad). ~Obvious risks are where it feels like we are in the cycle/possible downturn looming? and Brexit carnage holding back spending/investments. It doesnt help that some transactions have now been moved to H2 with the reasons for this unclear.~Its a dilemma at this price for me. A postive trading update will see the share price rise quite significantly.

[5chipper] 13/3/2019 05:29

It says that it is their latest completed deal. So hopefully not 5 months ago!

[pireric] 12/3/2019 14:45

Can't add, annoyingly, without being willing to go through a negotiated trade which I'm not going to do as you normally walk into a massive spread. So seemingly little stock readily around the last few hours

[pireric] 11/3/2019 20:20

Has anyone set up a tracker for deal flow for KBS Corporate per their website?



Know these deals can be relatively lumpy in nature, and actually more on the material side. Just trying to gauge when the likes of the £120m deal was added (i.e. whether it has been there for 2 months or 5 months, whether it is uploaded post-results regardless of when it closes, or just when it closes).

[tomg23] 11/3/2019 20:13

Large buys going though at the close. One for 40k @212p. Hoping it bodes well for the TU which should be any day

[pireric] 11/3/2019 20:02

Yes, thanks very much Geoff! As soon as this overhang clears (does seem to be one), fingers x'd this marks the bottom

7% free cash flow yield is exceptional for a growth business. Just need the market to feel comfort that existing forecasts are met and not over-optimistic

[tim1478] 11/3/2019 13:02

Thanks geoff21. Interesting.

[geoff21] 11/3/2019 12:25

I am a small business owner that is looking to sell my business within the next 2 years. I have had a couple of meetings to discuss this with Knightsbridge (K3C) and they periodically send me emails to update on M&A market conditions. Below is the latest email sent to me on Fri 8th March.

Hi Geoffrey,

We are experiencing record interest levels from buyers looking to purchase businesses in your sector - there has simply never been a better time to see what offers may be out there.

Looking at the activity within our group, we are proud to report that within the first eight weeks of 2019 we have already completed the sale of over 30 businesses – a 58% increase on the same period of 2018, testament to our ability to secure exceptional results for our clients and the strength of the Mergers and Acquisitions market at present.

We have been inundated with enquiries from buyers looking to purchase a business like yours to enable them to grow through acquisition. Appetite such as this helps us achieve strong competitive tension for the opportunities we represent, resulting in multiple offers and, ultimately, can maximise the final sale value of your business.

If you are open to testing the market now, or if you have any further questions about our services and the process as a whole, please call us on 01204 291 594 or reply to my email and we will get in touch with you at a time suitable for yourself.

Kind regards,

Victoria

[pireric] 08/3/2019 20:51

The short term, and transitory risk, is that deal flow slips around Brexit. (I dont think this obscures a great long term story) Overall UK M&A hasn't been great so far this year, but it's mainly the large and mega deals that are weaker. Charting data from Zephyr that is published in company valuation services, shows that overall levels on this barometer are actually solid, which I think is encouraging for SME activity. And hopefully marries with K3's confidence just 6 weeks ago

[insideryou] 08/3/2019 15:27

He is a talented trader, no doubt.

[pireric] 07/3/2019 21:05

Key H1 notes. They were in-line despite being lower y/y. All group companies at their highest ever level of transactions (in value, volume + pipe). Heavy investment in people for future growth. Retainer fees, a key leading indicator ..., continued to increase q/q

Short term risk if the second half proves more challenging than expected, but in light of the notes above, I think the risk/reward is great and the market has half front-run a weak H2 already, but on low conviction volumes

Rare that you can pick up a quality growth stock at <20x earnings when cash conversion is so high (evidenced in 7% free cash flow yield), let alone one with 40%+ margins.

[saj3] 07/3/2019 15:38

Should be a trading statement soon

[kevph] 07/3/2019 13:24

NT bailed on the 14th Feb for his recently bought amounts but still holds his earlier purchases according to his website.

[pireric] 07/3/2019 08:10

Ran some numbers yesterday

5.3% dividend yield
15.5x pe
6.9% free cash flow yield
Has derated from 35x PE to 15.5x
Over 40% margins

Ticks a lot of boxes and management have a history of underpromise, overdeliver

[davr0s] 06/3/2019 18:57

Trend broke a long time ago on this one

[pireric] 06/3/2019 12:25

I've opened a starter position here. I think it's cheap for the quality of the business model and think the recent sell off will prove short sighted by the market. Would think around 200p would end up being good support, especially since it's down nearly 20% on no news in only a few weeks

The market is punishing it because growth in the first half was lower but it's being unrealistic to think this business would have a smooth growth profile. Strong Kpis across the business even if half to half deals can slip

It's also trading at the lowest rating it has in a very long time.