Berenberg lowers target price on Kape Technologies

Berenberg said that due to concerns regarding churn and cash conversion, it initiated coverage on Kape with a 'hold' rating back in October 2021. However, the stock has fallen by roughly 35% since then, and with some "green shoots" in Kape's interim results and the stock looking "optically cheap", with upcoming accretive M&A using cash already raised, the analysts now think the shares could do well in the near term.

"Nevertheless, fundamentally our concerns on Kape remain, and we prefer to wait for a clean set of results in FY 2023 (without major acquisitions) to be sure that the improved cash conversion is not a one-off boost on account of the ExpressVPN acquisition," cautioned Berenberg.

The German bank also noted that Kape had just raised approximately $220.0m of new equity at 265.0p for more acquisitions, after having raised $354.0m in September 2021 at roughly 340.0p, meaning that there will be another acquisition soon and there will not be "a clean set of results" next year to gain confidence in the group's existing businesses, unless it improves its disclosures and reporting method.

"We think shares could trade positively, especially if Kape beats market expectations and announces an accretive acquisition. However, we are not yet convinced that the improved cash conversion is sustainable, and we still do not think Kape’s amortisation policy with regards to its capitalised sales and marketing dollars is comparable to peers. Therefore, on a comparable basis to peers, Kape is not as cheap as it appears – we think it trades at a circa 35% premium to the reported valuation below," said Berenberg.

Reporting by Iain Gilbert at Sharecast.com