Checkit — Bringing visibility to deskless worker operations

Checkit (AIM: CKT)

Last close As at 22/06/2024

GBP0.21

0.50 (2.44%)

Market capitalisation

GBP23m

More on this equity

Research: TMT

Checkit — Bringing visibility to deskless worker operations

Checkit grew normalised revenue 13% y-o-y in H122, with 16% h-o-h growth in annual recurring revenue (ARR). In H122, Checkit invested to grow its salesforce, enhance its technology platform and expand in the US, with the aim of capitalising on the opportunity in the deskless worker market. Management is confident about the outlook for the remainder of the year; our estimates are broadly unchanged.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Bringing visibility to deskless worker operations

H122 results

Software & comp services

17 September 2021

Price

55.5p

Market cap

£35m

$1.38/£

Net cash (£m) at end H122

8.5

Shares in issue

62.4m

Free float

56.2%

Code

CKT

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.8)

(11.9)

27.6

Rel (local)

(8.4)

(11.1)

6.9

52-week high/low

66p

44p

Business description

Checkit optimises the performance of people, processes and physical assets with connected digital solutions. Its headquarters are in Cambridge, UK, and its operations centre is in Fleet, UK.

Next events

Q3 trading update

November

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Checkit is a research client of Edison Investment Research Limited

Checkit grew normalised revenue 13% y-o-y in H122, with 16% h-o-h growth in annual recurring revenue (ARR). In H122, Checkit invested to grow its salesforce, enhance its technology platform and expand in the US, with the aim of capitalising on the opportunity in the deskless worker market. Management is confident about the outlook for the remainder of the year; our estimates are broadly unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/sales
(x)

01/20

9.8

(6.4)

(4.0)

0.0

N/A

2.7

01/21

13.2

(3.1)

(5.2)

0.0

N/A

2.0

01/22e

15.2

(4.5)

(7.2)

0.0

N/A

1.7

01/23e

17.8

(2.7)

(4.4)

0.0

N/A

1.5

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

H122: Investing to harness growth opportunities

In H122, Checkit strengthened its US business with the acquisition of Tutela (now called Checkit US) and boosted its sales, marketing and product development teams to accelerate the adoption of its deskless worker SaaS software. In H122, Checkit reported revenue growth of 23% y-o-y or 13% on a normalised basis (as if Checkit US was owned for both periods). Normalised recurring revenue grew 31% y-o-y while non-recurring revenue grew only 4% as new customers signed up to use Checkit’s software and existing customers shifted to a subscription-pricing model. This resulted in gross margin expansion of 8.3pp y-o-y. The EBITDA loss widened to £1.4m from £1.1m in H120, reflecting increases in headcount.

Estimates broadly unchanged

Our revenue forecasts are unchanged; we have increased our gross margin and operating cost assumptions to reflect H122 performance, although our normalised operating profit forecasts are unchanged for both years. Checkit’s SaaS software brings applications for smart people, smart assets and smart buildings onto a single platform and the immediate focus for the company is to sign up new customers in target markets (food retail, healthcare, hospitality, franchise, pharmaceutical and facilities management) and expand the use of its software by existing customers. ARR growth will be the key metric to track when assessing the progress of Checkit’s strategy to become a pure SaaS business.

Valuation: Subscription revenue growth key to upside

On an EV/sales multiple of 1.7x for FY22e and 1.5x for FY23e, Checkit trades at a significant discount to the UK software sector (5.6x current year sales). On a sum-of-the-parts basis attributing EV/sales multiples that better reflect the performance and prospects for each division, we estimate the stock is significantly undervalued. For example, using a 4x FY22e multiple for Checkit Connect and 1x for Checkit BEMS would result in a valuation of 80p per share.

Review of H122 results

Checkit published H122 revenues in its August trading update – see Exhibit 1. Exhibit 2 summarises the key highlights of the H122 results.

Exhibit 1: Revenue performance, H122 versus H121

£m

H122

H121*

y-o-y

Checkit Connect

Core business

Recurring

2.9

2.2

32%

Non-recurring

0.6

0.9

(35%)

3.5

3.1

12%

Checkit US (Tutela)

Recurring

0.2

0.2

13%

Non-recurring

0.7

0.7

(7%)

0.9

0.9

(2%)

Checkit Connect Total

Recurring

3.1

2.4

29%

Non-recurring

1.3

1.6

(19%)

Total

4.4

4.0

10%

Checkit BEMS

Non-recurring

3.5

3.0

19%

Group revenue

7.9

7.0

13%

Total recurring revenue

3.1

2.4

31%

Total non-recurring revenue

4.8

4.6

4%

Recurring/total

39%

34%

Source: Checkit. Note: *Checkit US was acquired 4 February 2021; growth rates shown on a normalised basis as if Checkit US was owned in the prior periods.

Exhibit 2: H122 results highlights

£m

H122

H121

y-o-y

Revenue

7.9

6.4

23.4%

Gross profit

3.5

2.3

52.1%

Gross margin

44.3%

35.9%

8.3pp

EBITDA

(1.4)

(1.1)

23.8%

Normalised operating profit

(1.7)

(1.5)

14.1%

Reported operating profit

(2.7)

(2.7)

(1.4%)

Normalised PBT

(1.7)

(1.5)

14.1%

Reported PBT

(2.7)

(2.7)

(1.4%)

Normalised net income

(1.7)

(1.5)

14.1%

Reported net income

(2.6)

(2.6)

(1.5%)

Normalised basic EPS (p)

(2.7)

(2.5)

8.0%

Reported basic EPS (p)

(4.2)

(4.3)

(2.3%)

Net cash

8.5

13.4

(36.6%)

Source: Checkit, Edison Investment Research

H122 revenue grew 23% on a reported basis and 13% on a normalised basis, with 10% growth for Checkit Connect (core business +12%, Checkit US -2%) and 19% growth for Checkit BEMS. ARR at the end of H122 was £6.6m, up 16% h-o-h, mainly due to customers going live with new subscription contracts. Recurring revenue made up 39% of H122 revenue. While Checkit US saw a decline in revenue in H122, in constant currency the business grew. Checkit US H122 recurring revenue grew 13% y-o-y as a result of new subscriptions. The core Checkit Connect business saw 32% y-o-y growth in recurring revenue in H122 as new subscriptions went live; at the same time, non-recurring revenue declined 35% y-o-y, reflecting the shift to a subscription model.

As the proportion of subscription-based revenue increased year-on-year, gross margin increased from 35.9% in H121 to 44.3% in H122. Operating costs increased to reflect the inclusion of Checkit US from 4 February and ongoing investment in sales, marketing and product development. This resulted in an EBITDA loss of £1.4m for H122 compared to a loss of £1.1m in H121. After depreciation and amortisation totalling £0.3m (excluding amortisation of acquired intangibles), Checkit generated a normalised operating loss of £1.7m, compared to £1.5m in H121. On a reported basis, the operating loss of £2.7m is after £0.7m amortisation of acquired intangibles and £0.3m in restructuring and integration costs. The company capitalised £0.6m of development costs in H122 and a further £0.3m for an ongoing internal digital transformation project. Checkit closed H122 with a gross/net cash position of £8.5m.

Business update

The business has ramped up its sales and marketing efforts this year (sales and marketing teams doubled in size in H122) and the pipeline for new business is four times higher than at the start of the year. Growth in H122 was from a combination of new customer wins and expansion of strategic enterprise accounts. In the US market, the company is seeing net new business in the healthcare sector and ongoing pricing conversions to the subscription-based model. Checkit US is also focusing on the food retail and hospitality sectors for new business.

As previously guided in the August trading update, the company noted that Checkit BEMS is likely to see lower revenue in H222, with the focus of the BEMS business increasingly on smart building technology through the Checkit Connect platform. When its transformation is complete, management expects to merge the BEMS business with Checkit Connect.

The company highlighted some of the new features it is adding to its platform this year:

Event driven actions: sensor alerts from Checkit’s monitoring technology can be fed directly into a corrective workflow for immediate action by frontline employees. The platform delivers a step-by-step workflow to frontline staff’s mobile device to guide them through the actions that need to be undertaken.

Job sharing: a tool for collaborative working to increase frontline flexibility while capturing all the action taken in a single record. Multiple staff can work on the same activity (eg lab opening procedures, cleaning, safety checks) without the risk of tasks being duplicated or missed. It is a useful option to ensure tasks are completed across different shifts or to allow remote teams to communicate and divide ad hoc tasks between them.

Checkit Franchise Edition: stores common workflows (eg food safety procedures, site inspections, equipment maintenance) in an online library to enable franchisors and other organisations to implement consistent brand standards and safety routines across their entire network of sites. It also supports benchmarking for measurement against KPIs.

Outlook and changes to forecasts

The board remains confident about the outlook for FY22 and plans to continue to invest cash wisely to deliver on its aggressive growth ambitions. Our revenue forecasts are unchanged; we have revised our gross margin assumptions to reflect the stronger than expected performance in H122 and increased our operating cost assumptions, but overall our normalised operating loss forecasts are unchanged. In FY22, we have increased our assumptions for capitalised development costs and related amortisation; the net effect of this is to reduce the EBITDA loss in FY22 by £0.2m. Our net cash forecasts are unchanged.

Exhibit 3: Changes to forecasts

£m

FY22e

FY22e

FY23e

FY23e

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Revenues

15.2

15.2

0.2%

15.2%

17.8

17.8

0.0%

16.8%

Gross profit

5.7

6.6

17.4%

41.4%

8.1

8.8

8.4%

32.0%

Gross margin

37.3%

43.7%

6.4%

8.1%

45.5%

49.4%

3.9%

5.7%

EBITDA

(3.9)

(3.7)

-5.4%

47.1%

(2.0)

(2.0)

2.1%

-44.3%

EBITDA margin

-25.6%

-24.2%

1.4%

-5.2%

-11.3%

-11.5%

-0.2%

12.6%

Normalised operating profit

(4.5)

(4.5)

-0.2%

44.4%

(2.7)

(2.7)

1.6%

-38.6%

Normalised operating profit margin

-29.6%

-29.4%

0.1%

-6.0%

-15.2%

-15.5%

-0.2%

14.0%

Reported operating profit

(6.2)

(6.3)

1.5%

18.4%

(3.1)

(3.2)

4.6%

-48.2%

Reported operating margin

-40.8%

-41.3%

-0.5%

-1.1%

-17.5%

-18.3%

-0.8%

23.0%

Normalised PBT

(4.5)

(4.5)

-0.2%

44.4%

(2.7)

(2.7)

1.6%

-38.6%

Reported PBT

(6.2)

(6.3)

1.5%

18.4%

(3.1)

(3.2)

4.6%

-48.2%

Normalised net income

(4.5)

(4.5)

-0.2%

44.4%

(2.7)

(2.7)

1.6%

-38.6%

Reported net income

(6.2)

(6.1)

-1.9%

37.9%

(3.1)

(3.2)

4.6%

-46.5%

Normalised basic & diluted EPS (p)

(7.2)

(7.2)

-0.2%

37.9%

(4.3)

(4.4)

1.6%

-38.6%

Reported basic EPS (p)

(9.9)

(9.7)

-1.9%

35.8%

(5.0)

(5.2)

4.6%

-46.5%

Net debt/(cash)

(5.1)

(5.1)

1.6%

-55.4%

(3.5)

(3.5)

2.0%

-31.0%

ARR

7.6

7.6

0.0%

34.2%

11.5

11.5

50.0%

Source: Edison Investment Research

Valuation

With Checkit not expected to hit full-year EBITDA profitability within our forecast period, comparison with peer multiples is restricted to EV/sales multiples. Checkit trades at a significant discount to UK software peers (on average 5.6x current year forecasts), in our view reflecting its current loss-making position and mix of recurring versus non-recurring business. Currently, c 55% of Checkit’s revenues could be considered as SaaS-based (ie Checkit Connect revenues), but we expect this proportion to increase over time as Checkit Connect grows more quickly than Checkit BEMS. Within Checkit Connect, we also expect recurring revenues to increase as a proportion of divisional revenues, which should also be more highly valued.

Looking at the business on a sum-of-the-parts basis, in the table below we show the potential valuation on the basis of a range of multiples for each part of the business. Using a multiple of 4x FY22e sales for Checkit Connect (at a discount to UK software peers and well below larger US SaaS peers) and 1x for Checkit BEMS (reflecting limited growth prospects for this part of the business) would suggest a fair value of 80p per share, well ahead of the current share price of 55.5p.

Exhibit 4: Sum-of-the-parts valuation (pence per share)

Checkit Connect multiple

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Checkit BEMS multiple

0.2

30

44

58

72

86

100

114

129

0.4

32

46

60

74

88

102

116

131

0.6

34

48

62

76

90

104

119

133

0.8

36

50

64

78

92

106

121

135

1.0

38

52

66

80

94

109

123

137

1.2

40

54

68

82

96

111

125

139

1.4

42

56

70

84

98

113

127

141

Source: Edison Investment Research

Exhibit 5: Financial summary

£m

2019

2020

2021

2022e

2023e

Year end 31 January

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.0

9.8

13.2

15.2

17.8

Cost of Sales

(1.0)

(7.2)

(8.5)

(8.6)

(9.0)

Gross Profit

0.0

2.6

4.7

6.6

8.8

EBITDA

 

 

(2.3)

(4.9)

(2.5)

(3.7)

(2.0)

Normalised operating profit

 

 

(4.4)

(6.5)

(3.1)

(4.5)

(2.7)

Amortisation of acquired intangibles

(0.1)

(1.0)

(1.3)

(1.3)

(0.5)

Exceptionals

0.0

(1.7)

(0.9)

(0.5)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

Reported operating profit

(4.5)

(9.2)

(5.3)

(6.3)

(3.2)

Net Interest

0.0

0.1

0.0

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(4.4)

(6.4)

(3.1)

(4.5)

(2.7)

Profit Before Tax (reported)

 

 

(4.5)

(9.1)

(5.3)

(6.3)

(3.2)

Reported tax

0.0

0.1

0.3

0.2

0.0

Profit After Tax (norm)

(4.4)

(6.4)

(3.1)

(4.5)

(2.7)

Profit After Tax (reported)

(4.5)

(9.0)

(5.0)

(6.1)

(3.2)

Minority interests

0.0

0.0

0.0

0.0

0.0

Discontinued operations

8.6

89.8

0.6

0.0

0.0

Net income (normalised)

(4.4)

(6.4)

(3.1)

(4.5)

(2.7)

Net income (reported)

4.1

80.8

(4.4)

(6.1)

(3.2)

Basic average number of shares outstanding (m)

178

161

62

62

62

EPS - basic normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(7.2)

(4.4)

EPS - diluted normalised (p)

 

 

(2.5)

(4.0)

(5.2)

(7.2)

(4.4)

EPS - basic reported (p)

 

 

2.3

50.2

(7.2)

(9.7)

(5.2)

Dividend (p)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

880.0

34.7

15.2

16.8

Gross Margin (%)

0.0

26.5

35.6

43.7

49.4

EBITDA Margin (%)

-230.0

-50.0

-18.9

-24.2

-11.5

Normalised Operating Margin

-440.0

-66.3

-23.5

-29.4

-15.5

BALANCE SHEET

Fixed Assets

 

 

5.0

8.5

6.8

8.0

7.5

Intangible Assets

2.9

7.3

6.0

7.1

6.4

Tangible Assets

1.7

1.2

0.8

0.9

1.1

Investments & other

0.4

0.0

0.0

0.0

0.0

Current Assets

 

 

19.5

19.8

17.5

11.1

9.6

Stocks

4.3

1.7

1.1

1.1

1.2

Debtors

5.1

3.4

4.4

4.8

4.9

Cash & cash equivalents

10.1

14.3

11.5

5.1

3.5

Other

0.0

0.4

0.5

0.1

0.0

Current Liabilities

 

 

(7.9)

(5.6)

(5.9)

(6.8)

(8.0)

Creditors

(7.6)

(5.1)

(5.6)

(6.5)

(7.7)

Tax and social security

(0.3)

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.5)

(0.3)

(0.3)

(0.3)

Long Term Liabilities

 

 

(0.3)

(1.3)

(0.8)

(0.8)

(0.8)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.3)

(1.3)

(0.8)

(0.8)

(0.8)

Net Assets

 

 

16.3

21.4

17.6

11.5

8.3

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

16.3

21.4

17.6

11.5

8.3

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(4.9)

(2.5)

(3.7)

(2.0)

Working capital

(0.5)

(1.0)

0.3

0.5

1.1

Exceptional & other

9.1

5.3

(0.7)

(0.5)

0.0

Tax

(0.5)

(0.5)

0.0

0.2

0.0

Net operating cash flow

 

 

5.8

(1.1)

(2.9)

(3.4)

(1.0)

Capex

(2.2)

(0.3)

(0.3)

(2.3)

(0.3)

Acquisitions/disposals

1.3

84.2

0.3

(0.2)

0.1

Net interest

0.0

0.1

0.0

0.0

0.0

Equity financing

0.0

(77.9)

0.5

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

(0.4)

(0.4)

(0.4)

Net Cash Flow

4.9

4.2

(2.8)

(6.4)

(1.6)

Opening net debt/(cash)

 

 

(5.2)

(10.1)

(14.3)

(11.5)

(5.1)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(10.1)

(14.3)

(11.5)

(5.1)

(3.5)

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 Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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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