Kontigo Care Q4 2022: Good conclusion to 2022
Research Update
2023-02-07
09:29
Redeye provides an update on Kontigo Care following its Q4 2022 report. We saw a positive end to 2022, with growth in active licences returning in the fourth quarter. We reiterate our base case of SEK11per share, while we revise our short-term projections in light of a weaker Swedish municipal economy in 2023.
Jessica Grunewald
Back on the growth track
By the end of Q4, the base of licences showed that the previous quarter’s negative growth was merely a hiccup. Kontigo Care added 50 new licences and three municipal agreements during the fourth quarter. We believe Kontigo Care is back on a growth trajectory for 2023, although we forecast that a weaker municipal economy might impede this growth.
Higher cost base due to MDR and marketing
The cost base increased by more than we anticipated in Q4 because of expenses associated with the MDR project. In addition, the cost of marketing also increased. However, we consider these costs unavoidable in the securing of future growth.
Intact fair value range with a base case of SEK11 per share
We have made minor changes to our estimates, resulting in an unchanged fair value range of SEK2 (bear case) to SEK19 (bull case), with a base case of SEK11 per share. We have mainly lowered our expectations for 2023, primarily due to a weaker economy for the municipalities. We highlight that the share trades at a significant discount to our base case and on low multiples.
| SEKm | 2021 | 2022 | 2023e | 2024e |
| Revenue Growth | 20.4% | 15.9% | 15.9% | 23.8% |
| EBITDA | 2.7 | 6.8 | 12.4 | 13.4 |
| EBIT | -1.1 | 2.9 | 8.0 | 3.9 |
| EBIT Margin | -4.5% | 10.2% | 24.3% | 9.5% |
| Net Income | -1.2 | 2.9 | 8.0 | 3.9 |
| EV/Revenue | 5.3 | 3.3 | 3.0 | 2.2 |
| EV/EBIT | -117 | 32.2 | 12.5 | 23.5 |
Investment thesis
Case
A game changer in addiction treatment(s)
Swedish health tech company Kontigo Care has a proven product-market fit with its disruptive addiction care offering in Sweden. This includes AI-driven treatment solutions for alcohol and gambling addiction, with the possible addition of solutions for drug addiction soon, too. We consider its software to be state-of-the-art, and its research backing is impressive. Its unique solution is available in more than half of the Swedish municipalities, bolstering confidence in the case. Thanks to the company’s highly scalable business model, predictable revenues, and high gross margins (84% in Q4 2022), an investment in Kontigo Care, in our view, offers attractive exposure to the fast-growing RPM (remote patient monitoring) niche of the eHealth and addiction care segment. Moreover, the case’s ESG (social) aspect is clear, while the addressable market suggests ample room for growth both in Sweden and internationally.
Evidence
Profitable SaaS solution with a growing customer base
Kontigo Care estimates it has reached about 10% of its potential market through its 157 municipality contracts, implying plenty of room to grow via existing and new municipality contracts. Kontigo Care has captured a chunk of this market, boosting our confidence in its ability to grab a potential new volume market: regional care in Sweden. Today, the municipalities alone are legally obliged to provide treatment services to those with alcohol and gambling addictions. However, there are strong indications this will soon switch to regional care, widening the addressable market significantly. Moreover, the pilot projects in the Netherlands and the distribution agreement in Finland hold great potential for Kontigo Care to grow further and scale its business model. We believe Kontigo Care can grow its top line by at least 50% without increasing personnel costs thanks to its scalable SaaS business model.
Challenge
Building the market and product awareness
Addictive care is traditional, and therapists in this area are not used to working with digital tools. The company must convince these therapists – its potential customers – of its value proposition. Patients also need to be aware of the brand and its offering to drive the market further by asking their therapists for it. We have noted that Kontigo Care has become more active and is using brand ambassadors and social media. We are encouraged by this and believe it can help drive awareness in Sweden.
Challenge
Internationalisation
In recent years, Kontigo Care has implemented an internationalisation strategy, although the COVID-19 pandemic has severely hindered this. Expanding its offering internationally is challenging owing to the different regulations and reimbursement systems across Europe. We believe Kontigo Care’s use of distributor agreements is a sound strategy that de-risks the case. It will likely take longer, but it is safer than building an in-house sales team for each targeted country.
Valuation
Upside potential and limited downside risk
We value Kontigo Care using three different DCF scenarios. Our fair value range is SEK2–19, with a base case of SEK11 per share, corresponding to an EV/Sales ratio of SEK2.1 for 2024e. In our base case, we estimate a 2023e–2027e sales CAGR of 22%, with an average EBIT margin of 21%. We use an 11.5% discount rate (WACC) based on Redeye’s Rating model. The stock market’s perception of Kontigo Care differs significantly from ours. Furthermore, the share is trading at a significant discount versus its peers on both forward-looking EV/EBIT and EV/Sales multiples. The most significant catalysts for the share are quarterly reports, the outcome of the drug study, and a broadening of the geographical scope for its Previct products.
Q4 2022 review
We are encouraged to see that the MRR and number of active licences increased again following the dip in Q3. As we stated in our previous research report, we believed the decrease in the active licence base was the result of seasonal and one-off effects.
Disclosures and disclaimers