Categories
Investing

Mach7 Technologies (ASX:M7T) Q4 FY20 Results

I’ve just been doing a quick catch up on M7T to see if the Q4 results and financials warranted a further allocation of my investment.

On first pass, the Free Cash Flow (FCF) result of $4.5m looks very impressive, and it seemed that they are ahead of time (by one year) in reaching my previous expectation of $1m, $2m, or $5m FCF for the year.

However, upon deeper inspection, it seems that this value has been entirely supported by what seems to be a one off payment from Hospital Authority Hong Kong (HAHK) of about $4.5m (this number was stated to be $4.8m in May, but later reported as $4.46m – perhaps due to exchange rate fluctuations?). I will pessimistically assume that this is a one off gain, for the purpose of calculating a valuation.

From this update, I feel confident that M7T is entirely capable of increasing FCF by $5m pa, which was previously the upper bounds of my expectations. I have come to this conclusion due to the fact that:

  • They have bought Client Outlook, which gives M7T a complete offering, covering all market requirements.
  • They seem to be about break even now, in terms of ongoing FCF.
  • They have managed to grow revenue by about $10m in the last year, which is $5m + the $5m one off sale to HAHK.

Obviously the global recession from COVID19 must be considered, and will likely slow the progression of sales. Rather than trying to calculate value in the M7T share price by having a guess at what growth might be in the following year, instead let’s look at what sort of growth is priced into the current share price to see if it seems reasonable.

Current Market Capitalization (MC) for M7T is about $222m. Removing the $60m they’ll have in the bank (from the recent Capital Raise [CR] of $48.9m + the $10.9m retail CR) gives a MC of $162m. Dividing this by a MC / profit ratio of 25 (20 to match the bank rate + 5 for growth) gives an expected NPAT of $6.5m for the coming year.

An NPAT of $6.5m is probably fine for anyone looking to invest because a failure to achieve that in the coming year would be met by forgiveness (due to the black swan event) and optimism that (combined with the coming year’s NPAT + the following year) the year after that will be a smashing result. In other words, I think that any purchase at today’s prices will likely result in no change if next year’s results are mediocre providing investor confidence wasn’t lost, yet any positive result would likely result in the stock being up to a double bagger as expectations were realigned for the following year.

Therefore, as a multi year investment, M7T is probably about the right price currently (though I’d rather pay closer to $0.80 a share to align with my expectations of $5m FCF in the coming year). That said, if I were to take a guess, all going well throughout the year, I see the share price going up to $1.19 within the next 12 months and beyond if the results surprise us positively.

Categories
Investing

Mach7 Technologies – Deep Dive Valuation

I started my deep dive into Mach7 Technologies (ASX:M7T) with the approach that I would read their company announcements in chronological order, so I could compile some historic financial data and learn how the company has grown over time.

I like this approach because you get an idea of whether they do what they said they would do in the previous announcements, and you get to see how successful they were. Reading announcements in order also lets you see how the reporting has changed, which gives a view about whether they might be trying to hide something or not.

Here is some of the historic data I managed to pull from their reports, please excuse the scrappy nature of it, perhaps I’ll get around to formatting the data nicely one day:

 FY2016FY2017FY2018FY2019FY2020
Cash1,929,7382,784,2252,504,5872,267,448 
Deferred Revenue(2,367,797)(2,855,480)(2,715,538)(3,478,189) 
Net Current Assets(2,159,334)3,253,0922,503,373729,013 
NTA(1,582,582)3,424,9952,995,6151,982,836 
Intangible Assets35,568,86917,843,21514,217,8078,382,384 
Deferred Tax Liability Arising On Intangible Assets(10,524,728)(5,329,432)(2,966,622)(2,202,642) 
Net Assets23,461,55915,938,77814,246,80010,365,222 
Capital Raising 9,000,0002,000,0002,800,000 
NotesAcquisition of Mach7 Technologies Pte Ltd to be amortized in Intangible Assets and Deferred Tax Liability over 5-7 years.Divestment of 3D Medical business ($93k). Debt paid from CR.This year saw a shift towards CARR model  
      
      
      
      
      
Cost BreakdownFY2016FY2017FY2018FY2019FY2020
Employee salaries, benefits & staff-related expenses8,363,25710,307,2589,069,748  
Professional fees and consultancy expenses1,963,1431,071,180491,482  
Marketing expenses1,358,190847,724499,029  
Travel and related expenses843,976679,156429,001  
Rent and occupancy expenses333,997380,847   
General administration expenses836,877439,856   
Total13,699,44013,726,02111,577,916  
Notes  There was a discrepancy in the FY2017 market expenses stated on FY2018 report compared with the FY2017 results stated on the FY2018 report. They also changed the breakdown of what they report here vs last year.  
Number of EmployeesFY2016FY2017FY2018FY2019FY2020
S&M811   
Services1315   
R&D1316   
Admin711   
Other54   
      
 FY2016FY2017FY2018FY2019FY2020
Revenue5,847,03110,268,9318,644,3459,347,146 
Reseller and distributor expenses670,404856,564352,562Included in Operating Expense 
Operating Expenses13,699,44013,726,02111,577,91613113385 
Other Net Income(114,090)91,163296,318(108,458) 
EBITDA (Adjusted)(8,636,903)(4,222,491)(2,637,253)(3,874,697) 
Depreciation & amortisation(6,801,288)(6,262,660)(3,700,467)(3,707,228) 
Impairment charges(6,504,960)(11,675,171)  
Share-based payments expenses30,267454,495967,138(195,538) 
Interest(493,717)(239,578)(11,348)(45,246) 
Income Tax Benefit1,994,1405,195,2972,362,810763,980 
NPAT(20,472,995)(17,659,098)(4,953,396)(7,058,729) 
NotesUnauditedCost are not capitalized Seems the CEO got replaced 
      
 FY2017    
Directors Cost1,146,579    
Executives Cost2,415,183    
 no troffing between the period of 2026-present    

This years figures (so far) are as follows:

$23.3M cash, no debt. $20M of that came from a cap raise and will be used for acquisitions for growth and increased sales and dev. NPAT $0.7M. Revenue $9.1M. CARR $8.8M.

This half figures don’t include the Hong Kong sale that was made.

Could expect $1.5-$2M revenue growth per year based on previous growth. The sales pipieline is of 46 potential customers for $40M – the pipeline stats were not published in former years, so it’s difficult to have a punt about what percentage of those sales will get converted. There are currently 9 RFPs for $32.5M, so it’s possible that growth could be higher thana few million if things work out well.

Summary

Risks

The most recent report from the 20th of Feb 2020 states that they are now cash flow positive. Costs are not capitalized and all the financials are not out yet so it’s impossible for me to be sure that they will be breaking even from this date as the announcement infers. Also, despite continually growing CARR, total revenue is lumpy across the years, and they’ve stated that they managed to break even by trimming costs. It would have been nicer to see the company break even because of revenue growth, rather than poorly managed costs or risk of the companies activities simply not being profitable by nature of the industry.

As profits from this date will be invested in growing the R&D and S&M teams, and making acquisitions if the opportunity arises, they might accelerate growth. Alternatively the strategy might fail and they will be left with bigger costs and many more CR’s to come.

Valuation

It’s very difficult to know how sales might grow, so I will look at a range of pessimistic and optimistic valuations. I’ll be keeping things very rough because there’s no point putting rough numbers (that are subject to volatility from big risks) through an exact and unnecessarily complex algorithm.

It’s also difficult to know how much of sales will contribute to profit. As the stated strategy for the coming year is to invest profits into growth, PE would not be an appropriate method of valuation. I see on the M7T website, they have published a DCF that has been done by a broker (Morgans). Since no one buys on a DCF valuation (except for legal reasons and a few others that aren’t relevant here), I’ll kindly use the brokers valuation of $1.16 per share ($210m) as an upper limited of value as guidance.

That leaves the most appropriate types of valuation as either a CM valuation or a multiple of CARR. While these valuations are appropriate for investments with a sale as an exit plan, in my opinion these types of valuation aren’t so good for working out the financial value in the company. For multiple of revenue, this is because revenue can be high and a company can never make any profit or even be capable of ever making a profit. As costs aren’t capitalized, it’s hard to have a punt at how much profit the revenue could translate to. Finally a CM valuation relies on trying to work out what value others place on the company. Useless if you’re looking for dividends, and a highly volatile measurement over any period of time as market sentiment changes. This is my least favourite type of valuation for these and other reasons – particularly bad in a bear market.

Therefore I will look at what PE could look like after removing cash from MC, with a few variations of forecasted growth and a multiple of revenue.

(To enable a PE valuation) I will assume that they weren’t to reinvest all profits into growth. Based on either $1m, $2m or a lofty $5m annual NPAT growth and on a forward PE of 25 (20 for the ROI + 5 for the growth), I see present day value as either $70m, $95m or $150m, respectively. I see the possibility to grow this in a years time to $95m, $145m or $295m on the same terms. However, this excludes any future capital expenditure, which could cause a year of not-so-good profit growth as PPE needs to be replaced.

For reference, on a multiple of revenue, the current MC represents a multiple of 12.72. Very high indeed. On a multiple of revenue basis, fairer value for the ASX market (I use 8x) would be more like $70m (which funnily enough, matches my lower target). In the event of things going sour, such a company could drop as low as $37m on a lower multiple of revenue (4.3x) or PE if investors see future sales as being incapable of turning into profit.

Therefore I think the current MC is slightly steep (as it always is on the stock market), however I can see value at the current MC of $112m but only if CARR growth continues to represent at least a few million per year as a multi year investment. Though my preference would be to buy at the $70m-$95m mark to ensure a fair value if the company doesn’t grow much.

Categories
ASX

Mach7 Technologies Limited (ASX:M7T)

Mach7 Technologies is a software company producing medical imaging solutions for the global healthcare industry with customers in (by order of size) Americas, Asia and Europe.

Revenue is generated by a combination of one-off sales and CARR for professional services such as support, and SaaS products. The medical imaging industry is predicted to be in excess of $3B and growing. M7T’s financial year end is on the 31st of June. The first half of the year is the 31st of December.

M7T partners with Client Outlook to sell their PACS software.

Mach7 Technology has been formerly known as: 3D Medical Limited, Safety Medical Products Limited, Syringe Safe Technologies Limited, Syringe Safe Technologies Pty Limited, and Hayjohann Pty. Ltd.

Glossary Of Terms

Mach7 Technologies use the following terms and acronyms in their reports. I have listed them here with their meanings for convenience and reference:

  • AI – Artificial Intelligence.
  • CARR – Contracted Annual Recurring Revenue.
  • CT – Computed Tomography. Sometimes referred to as CAT scan (computerized axial tomography). Imaging anatomical information from a cross-sectional plane of the body, each image generated by a computer synthesis of X-ray transmission data obtained in many different directions in a given plane. CT scans reveal both bone and soft tissues, including organs, muscles, and tumors. Image tones can be adjusted to highlight tissues of similar density, and, through graphics software, the data from multiple cross-sections can be assembled into 3D images.
  • DICOM – Digital Imaging and Communications in Medicine. It is a standard for the handling, storage, printing, and transmission of information in medical imaging. It includes a file format definition and a network communications protocol.
  • DR – Digital Radiography. A form of X-ray imaging, where digital X-ray sensors are used instead of traditional photographic film. Advantages include time efficiency through bypassing chemical processing and the ability to digitally transfer and enhance images.
  • ECM – Enterprise Content Management. Intelligent document workflows, making the sharing of non-image documents easier and enhancing efficiency for care providers.
  • EHR – Electronic Health Record.
  • EI – Enterprise Imaging. EI refers to imaging solutions for all healthcare professionals, rather than just focusing on radiology departments.
  • HIT – Health IT.
  • LTIP – Long Term Incentive Plan.
  • Modality – This is the source of acquisition of digital imaging data. The images may be from devices including US, MRI, PET, CT, ES, MG, DR, CR.
  • MRI – Magnetic Resonance Image. A technique for producing images of bodily organs by measuring the response of the atomic nuclei of body tissues to high frequency radio waves when placed in a strong magnetic field.
  • PACS – Picture Archiving and Communications System. A medical imaging technology which provides economical storage and convenient access to images from multiple modalities.
  • PET – Positron Emission Tomography. Is an imaging test that allows doctors to check for diseases in the body. The scan uses a special dye containing radioactive tracers. These tracers are either swallowed, inhaled, or injected into a vein in the arm depending on what part of the body is being examined. Certain organs and tissues then absorb the tracer. When detected by a PET scanner, the tracers help doctors see how well the organs and tissues are working. The tracer will collect in areas of higher chemical activity, which is helpful because certain tissues of the body, and certain diseases, have a higher level of chemical activity. These areas of disease will show up as bright spots on the PET scan.
  • RIS – Radiological Information Systems.
  • SaaS – Software As A Service. This is a software solution hosted in the cloud.
  • STIP – Short Term Incentive Program. The STIP is an annual incentive plan under which senior executives are eligible to receive an annual award if they satisfy challenging strategic, operational and individual performance targets.
  • US – Ultrasound. High-frequency sound waves which bounce off body tissues. The echoes are then converted into a picture called a sonogram. Ultrasound imaging allows an inside view of soft tissues and body cavities without the use of invasive techniques.
  • VNA – Vendor Neutral Archiving. A medical imaging technology where images and documents (and potentially any file of clinical relevance) are archived in a standard format with a standard interface, such that they can be accessed in a vendor-neutral manner by other systems.

More information on Mach7 Technologies Limited…