Kontigo Care: Resilient top-line
Research Update
2023-10-26
07:15
Redeye makes minimal estimate adjustments following the Q3’23 report, in which the reported figures were mainly in line with our estimates. While the present market conditions present ongoing challenges, we are optimistic that the new AI-based drug product has the potential to be a transformative innovation and a game changer for Kontigo Care. We have slightly adjusted our fair value range, primarily driven by the impact of increased interest rates.
Jessica Grunewald
Martin Wahlström
Net sales for the quarter came in at SEK7.1m (7.2m), down by 1% y/y and -2% q/q. Our net sales forecast showed a 1% negative variance compared to the actual figures. Monthly Recurring Revenue (MRR) remained unchanged q/q at SEK 2.4 million, aligning with our expectations. The active license base decreased from 893 to 888 during the quarter. However, since the beginning of Q4, 30 new licenses have been activated, and MRR has seen a slight increase compared to Q3, which we consider positive indicators for the Q4 report. EBIT reached SEK1.6m, surpassing our estimate of -SEK1.9 m, primarily due to cSEK3m higher work for own use than our projections.
Ulrika Geirs, the new CEO, assumed her role on 1 October. Two weeks later, a cSEK9 million directed share issue was announced, with the net proceeds primarily allocated to finalising product development and the prelaunch strategy for the company’s drug product. We view this directed share issue positively for several reasons. The terms were favourable, featuring only a 2% discount. Secondly, the share issue targets key personnel, the board, and major shareholders, underscoring management’s confidence in the new drug product and the company’s future potential. The results from the data analysis for the two studies regarding the development of a new application for monitoring drug and medication addiction using a mobile phone camera are expected to be presented in November. Subsequently, the company will make decisions regarding the commercial launch.
We have already updated our fair value range to incorporate the proposed directed share issue. Following the Q3 report, we made only slight modifications to our forecast. Due to rising interest rates, we have raised the risk-free rate from 2.5% to 3%, resulting in a WACC of 12% (11.5%). Largely owing to a higher WACC, our Base Case is now at SEK8.0 (8.5) per share. Our fair value range is adjusted to SEK1.4 per share to SEK16 (previously: SEK1.6-SEK17). Currently, Kontigo is trading at an EV/EBIT multiple of 8x based on our 2024e, which implies a c55% discount to its peers.
| SEKm | 2022 | 2023e | 2024e | 2025e |
| Revenues | 28.4 | 29.0 | 36.0 | 43.2 |
| Revenue Growth | 15.9% | 1.9% | 24.3% | 20.0% |
| EBITDA | 6.8 | 4.9 | 10.5 | 10.2 |
| EBIT | 2.9 | 0.70 | 6.3 | 7.3 |
| EBIT Margin | 10.2% | 2.4% | 17.6% | 16.9% |
| Net Income | 2.9 | 0.44 | 6.3 | 6.1 |
| EV/Revenue | 3.2 | 2.0 | 1.4 | 1.1 |
| EV/EBIT | 31.8 | 81.5 | 8.1 | 6.6 |
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 Q3 2023), 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 c170 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 SEK1.4–16, with a base case of SEK8 per share. In our base case, we estimate a 2023e–2027e sales CAGR of 18%, with an average EBIT margin of 17%. 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. The share is trading at a significant discount versus its peers on ’24e-‘25e EV/EBIT 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.
Disclosures and disclaimers