Shares in UK business sales and professional services firm K3 Capital (LSE: K3C) have done well for investors over the long run. While the K3C share price has had its ups and downs at times (it’s down about 25% over the last year), it has nearly tripled since the company’s 2017 initial public offering (IPO).
Should I buy this AIM-listed growth stock for my portfolio? Here, I’m going to look at the investment case for K3 Capital shares today.
K3 Capital: a high-quality company
There’s a lot to like about K3 Capital from an investment perspective, to my mind.
For starters, the company has a strong long-term growth track record. Between FY2016 and FY2021, for example, revenue climbed from £8.55m to £47.2m. That represents annualised growth of more than 40%.
Looking ahead, City analysts expect the company’s top line to keep rising. For the year ended 31 May 2022, the consensus revenue forecast is £60.4m. For the following financial year, it’s £74.8m. This is encouraging. It’s worth noting that in a recent trading update, the group advised that recent trading had been “positive”, and that it was “very confident” in its outlook for the year (just passed).
Secondly, the company is very profitable (it has a 5-year average return on capital of 60%) and pays regular dividends. Last year, it paid out 9.1p per share to investors. At the current share price, that equates to a yield of around 3.4%, which is certainly attractive in today’s low-interest-rate environment. Analysts expect the payout to keep rising in the near term. Dividends are not guaranteed going forward though, and forecasts can change.
Finally, the valuation seems very reasonable. With the consensus earnings per share forecast for this financial year sitting at 21.9p, the forward-looking price-to-earnings (P/E) ratio is just 12.3. That seems low to me, given the growth the company is generating.
One big risk to consider
One concern I have, however, is the cyclicality of the business.
Given that K3 Capital specialises in UK SME (small and medium-sized enterprises) business sales and advisory services, its fortunes are linked to the health of the UK economy. If the economy was to experience a downturn, the company could be impacted quite badly.
We’ve seen this before with K3 Capital. For example, in FY2019, revenue declined 18% and earnings fell 34% due to challenges associated with Brexit. As a result, the share price tanked.
Given that many economists are predicting a recession in the UK in the near future due to the cost-of-living crisis, there’s certainly an element of uncertainty here. The high level of growth we’ve seen from K3 Capital in recent years could come to an abrupt end if economic conditions deteriorate.
K3C shares: my move now
Given this risk, I’m going to leave K3 Capital shares on my watchlist for now.
In the current environment, I think there are safer growth stocks I could buy today.