Andy Makeham has been driving enterprise software business K3 Business Technology for eight years, but the real benefits have only shown through in the past couple of years. The energetic CEO has focused on the retail and manufacturing sectors and sold off non-core activities, with expansion having been built around Microsoft’s supply chain management software. Well placed to be a consolidator in its main markets, K3 looks unfairly unloved on a forward rating of less than six times earnings.

Alpha Landsteiner, purchased back in 2004, took K3 into the retail market. It added the Netherlands-based Landsteiner business in September 2007 at a cost of up to £13.6 million – a key attraction was its strong relationship with IKEA.

Makeham believes that the division’s ability to offer online and high street software will act as a buffer to any downturn in the high street. In addition, the retail side of the business is benefiting from the lack of competition after Torex Retail bought up most of K3’s competitors and then imploded. Torex ended up as part of another rival, Cerberus, but Makeham says that he has only seen it competing directly with K3 for one contract over the past year. Encouragingly, the retail division made operating profits of £2.91 million on sales of £20.5 million for 2007.

Although the manufacturing software side has lower revenues than retail, it makes more profit – last year operating profit was £3.42 million from revenues of £13.5 million. The base of the business is a mature operation bought from Kewill in 2000. K3 added SYSPRO software reseller IEG in June 2005 and last year paid £13.8 million for its main rival, McGuffie Brunton – SYSPRO is a Microsoft-based software product aimed at smaller manufacturing companies. Meanwhile, December’s acquisition of Index for £3 million has taken K3 into the process sector.

Makeham believes he can drive more business from existing customers of the group, a potential source of work he feels hasn’t been properly exploited in the past. He also plans to make further acquisitions and is looking for software companies that haven’t kept their software up to date but have ‘legacy user bases’. These users provide a strong recurring income stream and are potential customers for K3’s software. This is effectively what K3 did with the Kewill business it acquired, which continues to generate cash even though the amount is sliding over time. Significantly, some of its customers have provided new business for other companies in the division.

He also wants to buy businesses with Microsoft Dynamics AX expertise. It can be difficult to get experienced staff in this area and this is one way of obtaining them. K3 won’t overpay. The fact that it walked away from the purchase of AIM-quoted SirvisIT last year, when it couldn’t agree a realistic price, is evidence of that.

Although acquisitions will be important, K3’s continuing activities should progress, with both the retail and manufacturing divisions boasting strong business pipelines. In addition, there will be £750,000 of cost savings from the integration of IEG and McGuffie Brunton, although there will be a £250,000 increase in overhead spending to offset against that.

Taking into account all the recent acquisitions, the 2007 pro forma sales of K3 amounted to almost £41 million. Net debt was £13.4 million at the end of 2007 but that is expected to fall to £10 million at the end of this year. Meanwhile, the ambitious Makeham plans to grow K3 into a £100 million turnover business in three years’ time.

This year, underlying profits are forecast to increase from £4.7 million to £7.56 million, an estimate that leaves K3 trading on a forward price/earnings ratio of 5.8. That seems unfairly low when compound earnings growth of 30 per cent is expected between 2006 and 2010.

Meanwhile, K3 has hit the dividend trail, having paid a maiden dividend of 0.5p a share for last year, and has scope to improve its income credentials.

K3 Business Technology Group	AIM	£18.17m	76.50p	0.00p
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