Today, I’m focusing on FTSE AIM company K3 Capital (LSE: K3C). The business has a strong multi-year record of profitable, cash-generating growth. And with the share price near 347p, the market capitalisation is around £253m.
K3 earns its living advising Small and Medium-sized Enterprises (SMEs) on matters regarding Mergers & Acquisitions (M&As), tax and business recovery. And it aims to expand both organically and via “complementary” acquisitions.
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The growth strategy is working
And the strategy is working. I’d describe today’s full-year results as barnstorming! In the 12 months to 31 May, the business delivered a revenue increase of 215% compared to the prior year. And adjusted earnings per share shot up by 50%.
The directors rewarded shareholders by pushing up the total dividend for the year by 22%. And City analysts predict a further dividend hike in the current trading year north of 30%. I think it’s fair to say they expect further growth in the business. And the directors are certainly making positive noises about the outlook.
But although I’m hoping for those analysts’ estimates of double-digit earnings advances ahead to materialise, I’m also keen to collect income from the dividends. The forward-looking yield for the current trading year to May 2022 is running near 3.5%. And I think it’s rare to find UK shares with robust underlying growth prospects and a decent dividend yield.
Looking ahead, chief executive John Rigby said the business is now “cyclically balanced”. And he thinks it’s capable of performing well “across the entire economic cycle.” However, I think predictable revenues and profits could be hard for the company to achieve.
There could be cyclical challenges ahead
When times become tough for many businesses, they often chop consultant and advisory services from their budgets to save money. And even if K3 manages to keep its own turnover and profits on an even keel through any future economic downturns, investor sentiment could take the share price lower. I don’t anticipate a smooth ride holding the stock, but I’m encouraged by the long-term growth trajectory of the business.
And there’s no denying how busy the company has been in pursuit of growth. During the period, K3 raised just over £30m to feed its acquisition strategy. It signed off on five acquisitions, launched two new service lines and established one new joint venture.
Then in July, after the end of the period, the company raised a further gross £10m. And it announced an intent to acquire Knight Corporate Finance and Knight R&D to extend the M&A and Tax offerings of the overall business.
The forward-looking, earnings multiple for the current trading year to May 2022 is around 18, as I write. And that’s not a cheap valuation. I could come a cropper holding the stock if the company fails to make its earnings estimates.
But the balance sheet looks strong, so I’m inclined to add this stock to my portfolio with a five-year-plus holding period in mind. And while waiting for growth to unfold, I’ll collect the dividends and potentially roll them back into my investment.