Most tech investors are not used to low valuations. Teddy Sagi’s minorities should not settle for one either. The Israeli billionaire is offering to buy out minority shareholders in Aim-listed cyber security group Kape Technologies, valuing it at £1.25bn ($1.5bn). With more than half the shares already in Sagi’s hands, minorities should contest the skimpy 13 per cent premium to the three-month average price.
A cheap pound and low valuations have encouraged foreign investors to gobble up UK-listed tech companies. Kape, an acquirer of virtual private networks for mostly retail customers, is the latest. Disappointing results have weighed on the share price, down by half in dollar terms since the start of 2022, and underperforming the Nasdaq Composite by a third. At least the offer is higher than Kape’s most recent fundraising price at the end of last year.
Not that Kape is doing so badly. Purchasing Express VPN at the end of 2021 nearly trebled Kape’s revenues, estimated at $626mn last year. Express’s integration is progressing with $30mn of cost savings expected to be realised this year. Organic earnings growth is running at 17 per cent annually as of the first half of last year.
Sagi’s offer for Kape is worth 8 times forward ebitda, and in price terms still about 20 per cent below last year’s peak. Concerns about customer churn and cash conversion do weigh against Express VPN’s racy revenue growth profile.
Yet earnings per share growth could average 30 per cent between 2021 and 2024 assuming consensus forecasts are correct. That would suggest an attractive price/earnings compared to growth (PEG) ratio of 0.3. Usually, below 1 is attractive. UK-listed tech peer Avast was bought out by Norton LifeLock on a PEG ratio of 1.8, or an enterprise value to ebitda of 15 times in 2021.
Shares on Monday traded above the offer price. Even if Sagi controls most of the shares, Kape minorities still deserve more for their holdings.