K3 Business Technology

Software services firm K3 Business Technology (KBT) is already the largest provider of Microsoft-based business solutions in the UK, but it is now making good inroads into the Sage ERP market.

Following the completion of two Sage software acquisitions, K3 now has a business with annual sales of £12 million, and 850 customers. The market is highly fragmented so not only will it bring scope for plenty of complementary acquisitions, it also provides K3 with an opportunity to cross-sell managed services and hosting.

Trading conditions remain difficult but, despite this, in the year to June the AIM counter achieved a 20% increase in sales to £52.8m, as pre-tax profits increased 10% to £4.9m. K3 provides 'mission-critical' software and enjoys high customer retention levels as well as high recurring revenues of £24.2m (46% of total sales). The dividend is also up 50% to 0.75p.

In retail, K3 secured 29 contract wins, including clients such as Topps Tiles and Hobbycraft, but the average order value has slipped. The more exciting area is in Holland, where it heads up its international efforts. Here, sales are growing into the Nordic block and, thanks to a strong relationship with IKEA, it is winning business further afield such as in the Far East.

The manufacturing sector is also challenging but K3 still picked up 21 new accounts, worth a total of almost £3m. But with a customer base of more than 2,300, managed services is the key focus for K3 as it chips away at signing up sticky cloud-based revenues.

Chief executive Andy Makeham admits that markets 'remain tough' and that it is unlikely to get any easier. Broker Canaccord expects 2012 sales of £69.6m, pre-tax profits of £10.8m and EPS of 29.3p. We highlighted the attractions of K3 at 109.5p in March 2010, and with the price now much higher the rating is still undemanding.