Checkit — Growth strategy on track

Checkit (AIM: CKT)

Last close As at 28/03/2024

GBP0.22

−0.50 (−2.27%)

Market capitalisation

GBP24m

More on this equity

Research: TMT

Checkit — Growth strategy on track

Checkit made good progress during FY22 with its strategy to transition to a pure SaaS business. Annualised recurring revenue (ARR) grew 44%
y-o-y, helped by new customer wins and expansion of existing contracts, with recurring revenue reaching 75% of total revenue in Q422 compared to 51% for the full year. Management expects to meet market expectations for FY23; our FY23 forecasts are substantially unchanged and we introduce FY24 forecasts that factor in ARR growth of 32%.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Growth strategy on track

FY22 results

Software & comp services

28 April 2022

Price

38p

Market cap

£41m

Net cash (£m) at end FY22

24.2

Shares in issue

108.0m

Free float

56%

Code

CKT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.5)

(15.6)

(35.0)

Rel (local)

(8.6)

(13.3)

(37.4)

52-week high/low

66p

38p

Business description

Checkit optimises the performance of people, processes and physical assets with its intelligent operations software. It is headquartered in Cambridge, UK, and has operations centres in Fleet, UK, and Tampa, US.

Next events

AGM

9 June

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Checkit is a research client of Edison Investment Research Limited

Checkit made good progress during FY22 with its strategy to transition to a pure SaaS business. Annualised recurring revenue (ARR) grew 44%
y-o-y, helped by new customer wins and expansion of existing contracts, with recurring revenue reaching 75% of total revenue in Q422 compared to 51% for the full year. Management expects to meet market expectations for FY23; our FY23 forecasts are substantially unchanged and we introduce FY24 forecasts that factor in ARR growth of 32%.

Year end

Revenue (£m)

ARR* (£m)

PBT**
(£m)

EPS**
(p)

DPS
(p)

EV/sales
(x)

01/21

13.2

5.7

(3.1)

(5.2)

0.0

1.3

01/22

13.3

8.2

(4.7)

(7.0)

0.0

1.3

01/23e

11.2

12.0

(8.8)

(8.1)

0.0

1.5

01/24e

14.0

15.9

(6.6)

(6.1)

0.0

1.2

Note: *ARR, annualised recurring revenue; **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY22 results reflect a year of transformation

In H222, the company decided to accelerate its transition to a pure SaaS business model, using the £20m proceeds raised to ramp up investment in sales and marketing, and product development with the goal of driving growth in ARR. An 8% decline in normalised revenue reflects the winding down of the non-recurring BEMS business, as the company transitions to a smart building SaaS offering.

FY23: Scaling the business

We maintain our FY23 estimates, which forecast ARR growth of 46%, a revenue decline of 15% (as the BEMS project work is phased out) and recurring revenue growing to 89% of total revenue. For FY24, we forecast ARR growth of 32% and revenue growth of 24%. Checkit is focused on driving adoption of its software, particularly in the US, adding third-party IoT sensors to the platform, developing an alliance and partnership initiative and completing its Smart Buildings SaaS offering.

Valuation: Recurring revenue growth is key to upside

On an EV/sales multiple of 1.5x for FY23e and 1.2x for FY24e, Checkit trades at a significant discount to the UK software sector (4.2x current year sales, 3.5x next year sales) and US SaaS peers (8.8x current year, 7.0x next year sales). We note the current year multiple for the UK software sector is down c 23% and for US SaaS peers down c 45% since we wrote in December, reflecting the market shift from growth to value. If Checkit were to trade on the UK average for FY23e, it would be worth 65.9p per share and moving to trade in line with US SaaS peers would imply a valuation of c 114p. Key triggers to help Checkit attract a multiple more in line with SaaS peers include evidence that customers are signing up to use its software, existing customers are expanding their usage and non-recurring revenues are being converted to subscription services. The company has already made a good start on all three of these metrics.

Review of FY22 results

The company has had a busy year, acquiring Tutela in the US, making the decision to transition the BEMS business to a SaaS solution and raising net proceeds of £20m from the placing of 45.6m shares at 46p per share, to fund the acceleration of the transition to a pure SaaS business. We discuss the financial performance below.

Exhibit 1: FY22 results highlights

£m

FY21a

FY22e

FY22a

Change

y-o-y

ARR

5.7

8.2

8.2

0.0%

43.9%

Revenues

13.2

13.3

13.3

0.0%

0.8%

Gross profit

6.5

6.2

6.2

-0.4%

-4.6%

Gross margin

49.2%

46.8%

46.6%

-0.2%

-2.6%

EBITDA

(2.5)

(3.7)

(4.2)

15.0%

68.0%

EBITDA margin

-18.9%

-27.5%

-31.6%

-4.1%

-12.6%

Normalised operating profit

(3.1)

(4.5)

(4.7)

5.5%

51.6%

Normalised operating profit margin

-23.5%

-33.5%

-35.3%

-1.8%

-11.9%

Reported operating profit

(5.3)

(6.4)

(7.1)

11.8%

34.0%

Reported operating margin

-40.2%

-47.8%

-53.4%

-5.6%

-13.2%

Normalised PBT

(3.1)

(4.5)

(4.7)

5.5%

51.6%

Reported PBT

(5.3)

(6.4)

(7.1)

11.8%

34.0%

Normalised net income

(3.1)

(4.5)

(4.7)

5.5%

51.6%

Reported net income

(4.4)

(6.1)

(6.8)

10.7%

54.5%

Normalised basic & diluted EPS (p)

(5.2)

(6.6)

(7.0)

5.6%

34.6%

Reported basic EPS (p)

(7.2)

(9.1)

(10.0)

9.2%

39.6%

Net debt/(cash)

(11.5)

(24.2)

(24.2)

0.1%

110.4%

0.0%

43.9%

Source: Checkit

Checkit provided an FY22 trading update in February, when it confirmed it generated revenue of £13.3m in the year (+0.8% y-o-y), with ARR of £8.2m at year-end (+£2.5m/+43.9% y-o-y/+43% normalised). New business contributed £0.8m to ARR growth and transitioning customers over to subscription contracts contributed a further £0.3m. Annualised new bookings totalled £3.5m in the year; not all are yet included in ARR, reflecting customer contracts that have not yet gone live.

Today’s results confirmed that the EBITDA loss widened to £4.2m from £2.5m in FY21, as the company increased investment in sales and marketing, and product development. Sales and marketing spend doubled to £2.7m and product development spend totalled £3.4m (of which £1.5m was capitalised). The normalised operating loss of £4.7m was slightly larger than our £4.5m forecast, due to the higher cost base. The company reported one-off items totalling £1.0m (£0.7m for restructuring and transformation costs, £0.1m costs relating to the fundraise and £0.2m costs to close the Indian operations) as well as £1.4m amortisation of acquired intangible assets, resulting in reported operating loss of £7.1m.

The company closed the year with net cash of £24.2m, reflecting the £20m funds raised at the end of 2021.

Exhibit 2: Revenue breakdown

£m

FY22

FY21

FY21 normalised

y-o-y

y-o-y normalised

Recurring revenue

6.8

5.1

5.2

33.3%

30.8%

Non-recurring revenue

6.5

8.1

9.2

-19.8%

-29.3%

Total revenue

13.3

13.2

14.4

0.8%

-7.6%

Source: Checkit. Note: normalised revenue treats Tutela US (acquired February 2021) as owned for both periods

Recurring revenue grew 33% y-o-y, or 31% on a normalised basis, to make up 51% of FY22 revenue and 75% of Q422 revenue. The company noted that like-for-like US recurring revenue grew 82% y-o-y.

Non-recurring revenue declined 20% (29% normalised) as the company started the transition of the BEMS business to a SaaS offering.

Outlook and changes to forecasts

At year-end, the company had a pipeline worth £15.4m and noted the quality had improved over the year, with tier 1 enterprise targets increasing from 21% to 54% of the pipeline. In the US, the pipeline includes a number of multi-site organisations in the healthcare, food and hospitality sectors. Management is focused on rapid expansion in the US and is aiming for it to be the largest contributor to ARR by the end of FY24.

Management noted trading so far this year has progressed well and in line with board expectations, and is confident it will meet FY23 market expectations. While the conflict in Ukraine has no direct impact on Checkit’s activities, the board is cautious on the indirect impact and the potential for inflationary cost pressures.

We note that increasing labour costs and the tight labour market make it all the more important for customers to manage their existing workforces well. Checkit’s software helps improve the efficiency of existing staff, prevents process knowledge from disappearing when staff leave and helps with training new joiners.

We maintain our revenue, EBITDA and operating loss forecasts for FY23. We factor in slightly higher capitalised development costs, which reduces our net cash forecast at end FY23 by £0.3m. We also note the company has reclassified some costs between operational expenditures and cost of sales, reducing our gross margin forecast, but having no impact at the EBITDA level. We introduce forecasts for FY24 that factor in ARR growth of 32%, revenue growth of 24% and a reduction in the normalised operating loss to £6.6m from £8.8m in FY23.

Exhibit 3: Changes to forecasts

£'m

FY23e

FY23e

FY24e

Old

New

Change

y-o-y

New

y-o-y

ARR

12.0

12.0

0.0%

46.4%

15.9

32.3%

Revenues

11.2

11.2

0.2%

-15.4%

14.0

24.4%

Gross profit

8.4

6.5

-22.3%

5.5%

8.9

35.5%

Gross margin

75.0%

58.1%

-16.9%

11.5%

63.4%

5.2%

EBITDA

(7.8)

(7.8)

-0.3%

85.1%

(5.1)

-34.5%

EBITDA margin

-69.4%

-69.1%

0.3%

-37.5%

-36.4%

32.7%

Normalised operating profit

(8.8)

(8.8)

-0.2%

86.6%

(6.6)

-24.9%

Normalised operating profit margin

-78.3%

-78.0%

0.3%

-42.7%

-47.1%

30.9%

Reported operating profit

(9.4)

(9.4)

-0.2%

32.0%

(6.7)

-28.6%

Reported operating margin

-83.7%

-83.3%

0.3%

-30.0%

-47.8%

35.5%

Normalised PBT

(8.8)

(8.8)

-0.2%

86.6%

(6.6)

-24.9%

Reported PBT

(9.4)

(9.4)

-0.2%

32.0%

(6.7)

-28.6%

Normalised net income

(8.8)

(8.8)

-0.2%

86.6%

(6.6)

-24.9%

Reported net income

(9.4)

(9.4)

-0.2%

37.8%

(6.7)

-28.6%

Normalised basic & diluted EPS (p)

(8.1)

(8.1)

-0.2%

16.0%

(6.1)

-24.9%

Reported basic EPS (p)

(8.7)

(8.7)

-0.2%

-13.1%

(6.2)

-28.6%

Net debt/(cash)

(15.3)

(15.0)

-1.8%

-37.8%

(8.5)

-43.4%

Source: Edison Investment Research


Exhibit 4: Financial summary

£'m

2019

2020

2021

2022

2023e

2024e

31-January

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.0

9.8

13.2

13.3

11.2

14.0

Cost of Sales

(1.0)

(7.2)

(6.7)

(7.1)

(4.7)

(5.1)

Gross Profit

0.0

2.6

6.5

6.2

6.5

8.9

EBITDA

 

 

(2.3)

(4.9)

(2.5)

(4.2)

(7.8)

(5.1)

Normalised operating profit

 

 

(4.4)

(6.5)

(3.1)

(4.7)

(8.8)

(6.6)

Amortisation of acquired intangibles

(0.1)

(1.0)

(1.3)

(1.4)

(0.5)

(0.1)

Exceptionals

0.0

(1.7)

(0.9)

(1.0)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

(0.1)

0.0

Reported operating profit

(4.5)

(9.2)

(5.3)

(7.1)

(9.4)

(6.7)

Net Interest

0.0

0.1

0.0

0.0

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(4.4)

(6.4)

(3.1)

(4.7)

(8.8)

(6.6)

Profit Before Tax (reported)

 

 

(4.5)

(9.1)

(5.3)

(7.1)

(9.4)

(6.7)

Reported tax

0.0

0.1

0.3

0.3

0.0

0.0

Profit After Tax (norm)

(4.4)

(6.4)

(3.1)

(4.7)

(8.8)

(6.6)

Profit After Tax (reported)

(4.5)

(9.0)

(5.0)

(6.8)

(9.4)

(6.7)

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

8.6

89.8

0.6

0.0

0.0

0.0

Net income (normalised)

(4.4)

(6.4)

(3.1)

(4.7)

(8.8)

(6.6)

Net income (reported)

4.1

80.8

(4.4)

(6.8)

(9.4)

(6.7)

Basic average number of shares outstanding (m)

178

161

62

68

108

108

EPS - basic normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(7.0)

(8.1)

(6.1)

EPS - diluted normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(7.0)

(8.1)

(6.1)

EPS - basic reported (p)

 

 

2.3

50.2

(7.2)

(10.0)

(8.7)

(6.2)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

880.0

34.7

0.8

(15.4)

24.4

Gross Margin (%)

0.0

26.5

49.2

46.6

58.1

63.4

EBITDA Margin (%)

(230.0)

(50.0)

(18.9)

(31.6)

(69.1)

(36.4)

Normalised Operating Margin

(440.0)

(66.3)

(23.5)

(35.3)

(78.0)

(47.1)

BALANCE SHEET

Fixed Assets

 

 

5.0

8.5

6.8

8.3

9.8

10.4

Intangible Assets

2.9

7.3

6.0

7.3

8.6

9.0

Tangible Assets

1.7

1.2

0.8

1.0

1.2

1.4

Investments & other

0.4

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

19.5

19.8

17.5

28.7

18.7

12.3

Stocks

4.3

1.7

1.1

1.8

1.2

0.8

Debtors

5.1

3.4

4.4

2.6

2.5

2.9

Cash & cash equivalents

10.1

14.3

11.5

24.2

15.0

8.5

Other

0.0

0.4

0.5

0.1

0.0

0.0

Current Liabilities

 

 

(7.9)

(5.6)

(5.9)

(5.4)

(6.2)

(7.0)

Creditors

(7.6)

(5.1)

(5.6)

(4.9)

(5.7)

(6.5)

Tax and social security

(0.3)

0.0

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.5)

(0.3)

(0.5)

(0.5)

(0.5)

Long Term Liabilities

 

 

(0.3)

(1.3)

(0.8)

(0.6)

(0.6)

(0.6)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.3)

(1.3)

(0.8)

(0.6)

(0.6)

(0.6)

Net Assets

 

 

16.3

21.4

17.6

31.0

21.7

15.0

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

16.3

21.4

17.6

31.0

21.7

15.0

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(4.9)

(2.5)

(4.2)

(7.8)

(5.1)

Working capital

(0.5)

(1.0)

0.3

0.2

1.5

0.8

Exceptional & other

9.1

5.3

(0.7)

(1.0)

0.0

0.0

Tax

(0.5)

(0.5)

0.0

0.1

0.0

0.0

Net operating cash flow

 

 

5.8

(1.1)

(2.9)

(4.9)

(6.3)

(4.3)

Capex

(2.2)

(0.3)

(0.3)

(2.3)

(2.6)

(1.8)

Acquisitions/disposals

1.3

84.2

0.3

0.0

0.1

0.0

Net interest

0.0

0.1

0.0

0.0

0.0

0.0

Equity financing

0.0

(77.9)

0.5

20.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

(0.4)

(0.3)

(0.4)

(0.4)

Net Cash Flow

4.9

4.2

(2.8)

12.7

(9.2)

(6.5)

Opening net debt/(cash)

 

 

(5.2)

(10.1)

(14.3)

(11.5)

(24.2)

(15.0)

FX

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(10.1)

(14.3)

(11.5)

(24.2)

(15.0)

(8.5)

Source: Checkit, Edison Investment Research

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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