Kontigo Care: Mixed short-term outlook
Research Update
2024-05-13
12:23
Analyst Q&A
Closed
Jessica Grunewald answered 5 questions.
Redeye reiterates its valuation following the Q1 2024 report. We are encouraged by the all-time high net sales, although we recognise the challenges expected for growth in 2024 due to decreased municipal budgets in Sweden. Nevertheless, we maintain optimism regarding the newly launched Previct Drug, which has already gained significant attention in both Sweden and internationally.
JG
MW
Jessica Grunewald
Martin Wahlström
Contents
Q1 2024 review
Financials Q1 2024: Sales
Financials Q1 2024: Profitability and cost base
Financials Q1 2024: Cash flow
Outlook
Estimates and revisions
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article
Net sales for the quarter were SEK7.6m (7.1), reflecting year-on-year growth of 7% and 2% q/q growth, 4% above our forecast. Monthly Recurring Revenue (MRR) was SEK2.5m, a 2% decrease q/q and a minor negative deviation of 4% vs our estimate. OPEX amounted to SEK9.5m (10.4), 22% above our projected SEK7.8m. One-time expenses related to the CEO change, the establishment in Finland, and higher costs for finance explain the deviation. Higher capitalised development and net sales offset the OPEX surprise, resulting in an EBIT margin of 3%, consistent with expectations. During April, Kontigo Care carried out a directed share issue of SEK10.5m to its main owner, ShapeQ GmbH. We estimate that the current cash position is around cSEK14m.
Despite achieving an all-time high net sales during the quarter, we anticipate a challenging 2024 ahead in terms of growth due to significantly reduced municipal budgets. An indication of this is the quarterly MRR decrease on a q/q basis. Meanwhile, the new Previct Drug product will likely help attract new customer segments and has the potential to become pivotal for Kontigo Care. We believe several ongoing discussions regarding partnerships for launching Previct Drugs outside Sweden exist. We think a partner strategy for international expansion is wise for a small company such as Kontigo Care.
We have made minimal adjustments to our forecasts. We are still factoring in a growth rate of 3% for 2024e, aligning with the 2% growth in 2023. Our Base Case is intact at SEK5.8 per share, and our fair value range is SEK1.1 per share to SEK12.3. Further, our valuation already included the dilution from the directed share issue of SEK10.5m in April.
SEKm | 2023 | 2024e | 2025e | 2026e |
Revenues | 44.4 | 41.9 | 49.3 | 61.2 |
Revenue Growth | 22.8% | -5.8% | 17.7% | 24.2% |
EBITDA | 4.5 | 5.9 | 13.0 | 19.6 |
EBIT | 0.60 | 0.30 | 3.7 | 8.5 |
EBIT Margin | 2.1% | 1.0% | 9.7% | 15.4% |
Net Income | 0.34 | -0.07 | 3.4 | 8.1 |
EV/Sales | 2.1 | 2.7 | 2.1 | 1.3 |
EV/EBIT | 102 | 269 | 21.4 | 8.7 |
We see a stable Q1 2024 report from Kontigo Care, meeting our projected outcomes with no significant deviations apart from an elevated OPEX due to several one-time expenses. The municipal sector in Sweden continues to face challenges with tightly constrained budgets, a trend anticipated to persist throughout the year. Meanwhile, the newly launched Previct Drugs is expected to attract new customer segments. In addition, we believe there are several ongoing discussions regarding partnerships for launching Previct Drugs outside Sweden.
Kontigo Care: Actual vs Expectations | ||||
(SEKm) | Q1'23 | Q1'24 Actual | Q1'24e | Div vs est |
Net sales | 7.1 | 7.6 | 7.3 | 4% |
Work for own use | 3.3 | 3.1 | 2.6 | 19% |
OPEX | 10.3 | 9.5 | 7.8 | 22% |
EBIT | -0.4 | 0.2 | 0.4 | n.a |
EBIT margin (%) | -6% | 3% | 5% | -2pp |
Sales growth y/y | 4% | 7% | 3% | 4pp |
MRR | 2.5 | 2.5 | 2.6 | -4% |
Source: Redeye Research |
Net sales for the quarter were SEK7.6m (7.1), reflecting a y/y growth of 7% and 2% q/q growth, 4% above our forecast. Net sales per country were SEK7.3m (6.6) for Sweden and 0.3 (0.5) for Finland. The lower sales y/y from Finland are derived from Kontigo Care taking over and building up the Finish distribution. Higher capitalised development and net sales offset the OPEX surprise, resulting in an EBIT margin of 3%, consistent with expectations.
Source: Redeye Research
During the quarter, the company secured two new frame agreements with municipalities. Kontigo Care now has agreements with c60% of the municipalities in Sweden. The base of active licenses decreased during the quarter from 981 to 871. MRR (Monthly Recurring Revenue) was SEK2.5m, a 2% decrease q/q and a minor negative deviation of 4% vs our estimate.
Source: Redeye Research
Source: Redeye Research
OPEX amounted to SEK9.5m (10.4), 22% above our projected SEK7.8m. One-time expenses related to the CEO change, the establishment in Finland, and higher finance costs explain the deviation.
Source: Redeye Research
Kontigo Care uses capitalisation, i.e., it records an asset (in this case, development costs) on the balance sheet instead of immediately expending it on the income statement. In Q1, Kontigo Care activated SEK3.1m for development (mainly derived from the new Previct Drug application), while D&A amounted to cSEK0.6m (amortisation amounted to SEK0.2m). EBITDAC (EBITDA- CAPEX) was -SEK2m, which was no surprise since Kontigo Care continues to invest in the Previct drug application and the Previct platform. The CEO, Ulrika Giers, has referred to 2024 as an investment year.
For SaaS businesses such as Kontigo Care, EBITDA and EBITDA margin are not ideal profitability metrics as they do not account for R&D costs. Since R&D is often a significant expense in this sector, metrics like EBIT (which amortises capitalised R&D over time) or EBITDA minus capitalised R&D / EBITDA- CAPEX offer a more precise perspective on underlying profitability. Our preferred metric is EBITDA minus CAPEX, treating all R&D expenses as upfront costs.
Cash flow from operating activities was cSEK0.1m. CAPEX was SEK3.1; by the end of the quarter, cash and cash equivalents amounted to cSEK6.6m. During April, Kontigo Care carried out a directed share issue of SEK10.5m to its main owner, ShapeQ GmbH. We estimate that the current cash position is around cSEK14m.
Source: Redeye Research
Despite achieving an all-time high net sales during the quarter, we anticipate a challenging 2024 ahead in terms of growth due to reduced municipal budgets. An indication of this is the quarterly MRR decrease on a q/q basis. Meanwhile, the new Previct Drug during ’24 will likely help attract new customer segments and has the potential to become pivotal for Kontigo Care. We believe several discussions are ongoing regarding partnerships for launching Previct Drugs outside Sweden. We think a partner strategy for international sales is wise for a small company such as Kontigo Care.
The announcement from April that the company has reached an important milestone on the path to CE certification under the new EU regulation for medical devices, MDR, adds to a positive outlook. The review of the comprehensive technical documentation is completed and approved. We believe the transition to MDR and the CE certification of Previct Alcohol as a medical device software strengthens the company’s competitive position and enables growth and development outside Sweden.
The directed share issue of SEK10.5m in April to Kontigo Care's main owner, ShapeQ GmbH, is encouraging for several reasons. Firstly, the less than 1% discount is advantageous, especially in the current challenging market conditions. Secondly, the knowledge that the main owner has supported and is likely to continue supporting the company is reassuring. Thirdly, with capital secured, management can now concentrate on executing its strategy rather than spending time raising growth capital.
We have made minimal adjustments to our forecast. We are still factoring in a growth rate of 3% for 2024e, aligning with the 2% growth in 2023. In our estimates, we are currently not factoring any sales outside Sweden and Finland. Details of our revised forecasts for the years 2024-26e are summarised in the table below:
Kontigo Care: Forecast Adjustments | ||||
(SEKm) | 2024e | 2025e | 2026e | |
Net sales | Old | 30 | 38 | 55 |
New | 30 | 38 | 55 | |
change (%) | 0% | 0% | 0% | |
Total revenue | Old | 40 | 49 | 61 |
New | 42 | 49 | 61 | |
change (%) | 5% | 0% | 0% | |
EBITDA | Old | 8 | 13 | 20 |
New | 6 | 13 | 20 | |
change (%) | -29% | 0% | 0% | |
EBIT | Old | 1 | 4 | 8 |
New | 0 | 4 | 8 | |
change (%) | -72% | 0% | 0% | |
Source: Redeye Research |
Kontigo Care: Income Statement | ||||||||
(SEKm) | 2023 | 2024Q1a | 2024Q2e | 2024Q3e | 2024Q4e | 2024e | 2025e | 2026e |
Net Sales | 29 | 8 | 8 | 7 | 8 | 30 | 38 | 55 |
Work for own use | 8 | 3 | 3 | 3 | 3 | 12 | 11 | 6 |
Revenues | 44 | 11 | 11 | 10 | 11 | 42 | 49 | 61 |
Raw material & Consumables | 0 | 0 | 0 | 0 | 0 | -1 | -1 | -2 |
Other external costs | -24 | -5 | -5 | -4 | -5 | -19 | -19 | -21 |
Personel costs | -15 | -4 | -4 | -4 | -4 | -17 | -16 | -19 |
D&A | -4 | -1 | -2 | -2 | -2 | -6 | -9 | -11 |
Total Operating expenses | -44 | -10 | -10 | -10 | -11 | -42 | -46 | -53 |
Operating Profit | 1 | 0 | 0 | 0 | 0 | 0 | 4 | 8 |
Tax | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Net Profit | 1 | 0 | 0 | 0 | 0 | 0 | 4 | 8 |
Source: Redeye Research |
We value Kontigo Care using a DCF valuation based on certain long-term sales growth and margin assumptions. Our valuation remains intact with a Base Case of SEK5.8 per share and a fair value range of SEK1.1 per share to SEK12.3. Further, our valuation already included the dilution from the directed share issue of SEK10.5m in April. Our valuation does not factor in any additional dilution, as we believe the current cash position to be adequate. However, if Kontigo Care pursues a more aggressive sales strategy, additional growth capital is likely required. Our base case is derived from the financial forecasts in the table above and the long-term assumptions outlined in the table below.
Kontigo Care: Base Case scenario | ||||
Assumtions: | 2024-'28e | 2029-'32e | DCF-value | |
CAGR sales | 24% | 18% | WACC | 12% |
EBIT margin (avg) | 17% | 23% | NPV of FCF | 96 |
NPV of Terminal value | 86 | |||
Terminal | Value of the Firm | 181 | ||
Sales Growth | 2% | Net Cash | 3 | |
EBIT margin | 18% | Equity value | 184 | |
Shares 2024e (m) | 32 | Fair Value per share | 5.8 | |
Source: Redeye Research |
Case
A game changer in addiction treatment(s)
Evidence
Profitable SaaS solution with a growing customer base
Challenge
Building the market and product awareness
Challenge
Internationalisation
Valuation
Upside potential and limited downside risk
People: 3
Kontigo Care has a competent team of scientists, business developers and sales personnel. Some of the management team have been with the company since the beginning. The core competence is in data science and statistics: Kontigo's AI-driven prediction platform is based on the organising and statistical analysis of a large quantity of data, in order to see patterns and filter out events from the larger trend.
The company culture is characterised by integrity, openness for innovative solutions and long-term committment. The team is driven by the mission to develop a new treatment paradigm for addiction, consisting of a complete support system, tracking of alcohol consumption, and timely intervention, before relapse occurs.
Business: 3
Kontigo Care is a SAAS company, asset-light and easy to scale. Its products consist mainly of machine learning algorythms based on large quantities of data, which are difficult to replicate.
The company offers a clear benefit to its customers: patients, municipalities and therapists. The majority of the revenues are public pay from contracts with Swedish municipalities, which are obliged by law to offer therapy to addicts.
Since Kontigo has so many contracts and clients, it is not directly dependent on any municipality in particular, but it is rather dependent on changes in public policy. Kontigo also partners with Oriola, a corporate health provider in Sweden, to offer Previct to private companies in the framework of corporate health. Kontigo is also diversifying revenues with international expansion in the Netherlands and Finland, at a later stage Germany and the Baltic states.
Kontigo does not have any notable competitors in Sweden, its produces its hardware in Sweden and is not directly dependent on raw materials. The company has improved its gross margin significantly over the past years.
Financials: 2
Kontigo has high revenue growth rate. The company invests heavily in new product development and has high R&D costs, rather than report a profit and pay tax. Kontigo prefers to allocate capital to deveoping new products and establishing new sales channels, to grow the business. Once its new AI-driven drug addiction treatment app is developed, we expect R&D costs to come down somewhat.
Kontigo has high gross margin, around 84%, and it is a capital-light business that can easily scale, without large capital investments. It sells licenses for its software, which have a long duration - most are for 12 months - and paid in advance. The revenues are recurring and the company does not need to raise cash in the near future.
It spends carefully, invests in the most efficient sales channels and does not currently pay dividends.
Income statement | |||
SEKm | 2023 | 2024e | 2025e |
Revenues | 44.4 | 41.9 | 49.3 |
Cost of Revenue | -15.2 | -11.6 | -10.2 |
Operating Expenses | 39.7 | 35.4 | 35.6 |
EBITDA | 4.5 | 5.9 | 13.0 |
Depreciation | 1.2 | 1.6 | 2.0 |
Amortizations | 2.7 | 4.1 | 7.3 |
EBIT | 0.60 | 0.30 | 3.7 |
Shares in Associates | 0.05 | 0.05 | 0.05 |
Interest Expenses | 0.26 | 0.36 | 0.00 |
Net Financial Items | -0.26 | -0.36 | 0.00 |
EBT | 0.34 | -0.07 | 3.7 |
Income Tax Expenses | 0.00 | 0.00 | 0.33 |
Net Income | 0.34 | -0.07 | 3.4 |
Balance sheet | |||
Assets | |||
Non-current assets | |||
SEKm | 2023 | 2024e | 2025e |
Property, Plant and Equipment (Net) | 3.5 | 3.6 | 4.1 |
Goodwill | 0.00 | 0.00 | 0.00 |
Intangible Assets | 31.2 | 39.2 | 42.8 |
Right-of-Use Assets | 0.00 | 0.00 | 0.00 |
Other Non-Current Assets | 0.41 | 0.41 | 0.41 |
Total Non-Current Assets | 35.2 | 43.3 | 47.4 |
Current assets | |||
SEKm | 2023 | 2024e | 2025e |
Inventories | 0.29 | 0.30 | 0.38 |
Accounts Receivable | 3.5 | 3.0 | 3.8 |
Other Current Assets | 0.87 | 0.89 | 1.2 |
Cash Equivalents | 9.8 | -2.6 | -3.0 |
Total Current Assets | 14.4 | 1.6 | 2.4 |
Total Assets | 49.6 | 44.9 | 49.8 |
Equity and Liabilities | |||
Equity | |||
SEKm | 2023 | 2024e | 2025e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 30.2 | 30.1 | 33.5 |
Non-current liabilities | |||
SEKm | 2023 | 2024e | 2025e |
Long Term Debt | 0.00 | 0.00 | 0.00 |
Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 |
Other Non-Current Lease Liabilities | 0.00 | 0.00 | 0.00 |
Total Non-Current Liabilities | 0.00 | 0.00 | 0.00 |
Current liabilities | |||
SEKm | 2023 | 2024e | 2025e |
Short Term Debt | 6.4 | 1.4 | 1.4 |
Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 |
Accounts Payable | 1.4 | 1.5 | 1.9 |
Other Current Liabilities | 11.6 | 11.8 | 12.9 |
Total Current Liabilities | 19.4 | 14.7 | 16.3 |
Total Liabilities and Equity | 49.6 | 44.9 | 49.8 |
Cash flow | |||
SEKm | 2023 | 2024e | 2025e |
Operating Cash Flow | 6.0 | 6.3 | 13.0 |
Investing Cash Flow | -16.7 | -13.7 | -13.4 |
Financing Cash Flow | 14.9 | -5.0 | 0.00 |
Disclosures and disclaimers
Contents
Q1 2024 review
Financials Q1 2024: Sales
Financials Q1 2024: Profitability and cost base
Financials Q1 2024: Cash flow
Outlook
Estimates and revisions
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article