Checkit — Building foundations in the US

Checkit (AIM: CKT)

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Research: TMT

Checkit — Building foundations in the US

Checkit has acquired Tutela, its US distributor, for $0.85m/£0.62m in cash and intends to use it as a springboard for its plans to grow the wider business in the US. At the same time, Checkit has strengthened its management team, hiring a managing director to run the US operations and a group chief commercial officer (CCO). With a significantly larger addressable market than the UK, Checkit is keen to drive adoption of its connected solutions by large US enterprises.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Checkit

Building foundations in the US

US acquisition

Software & comp services

4 February 2021

Price

50p

Market cap

£31m

$1.28:£1

Net cash (£m) at end Q321

12.4

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

(2.0)

12.4

63.9

Rel (local)

(2.8)

(1.3)

80.3

52-week high/low

54p

24p

Business description

Checkit optimises the performance of people, processes and physical assets with connected digital solutions. The company is headquartered in Cambridge, UK and has its operations centre in Fleet, UK.

Next events

FY21 trading update

February

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Checkit is a research client of Edison Investment Research Limited

Checkit has acquired Tutela, its US distributor, for $0.85m/£0.62m in cash and intends to use it as a springboard for its plans to grow the wider business in the US. At the same time, Checkit has strengthened its management team, hiring a managing director to run the US operations and a group chief commercial officer (CCO). With a significantly larger addressable market than the UK, Checkit is keen to drive adoption of its connected solutions by large US enterprises.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/sales
(x)

01/19

1.0

(4.4)

(2.5)

0.0

N/A

N/A

01/20

9.8

(5.1)

(3.1)

0.0

N/A

1.7

01/21e

13.0

(3.8)

(6.0)

0.0

N/A

1.3

01/22e

14.1

(3.2)

(5.2)

0.0

N/A

1.2

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

Acquisition of Tutela US

Checkit has acquired Tutela Monitoring Systems (Tutela), its exclusive distributor in the US, for consideration of $0.85m/£0.62m from existing cash resources. Tutela was previously owned by Next Control Systems (acquired by Checkit in May 2019) before a management buyout in August 2018. Florida-based Tutela provides wireless temperature monitoring sensors for all applications and facilities that store sensitive inventory for healthcare businesses, similar to the UK-based CAM+ business already owned by Checkit. Checkit intends to use Tutela as a platform to pursue all target industries and verticals in the US. In CY20, Tutela generated revenue of $2m/£1.46m and PBT of $0.27m/£0.2m; on a consolidated basis, this would equate to revenue of c £1m. Netting off $0.25m cash in the Tutela business and applying the 3x EBITDA multiple paid, this implies EBITDA of $0.2m and an EBITDA margin of 10%. We maintain our forecasts pending the year-end trading update expected later this month.

Building out the management team

Checkit has recently made two additions to its management team: Kit Kyte has joined as CCO, based in the UK, and Steve Peck as managing director of the US business. Based in the US, he will oversee the acquired business’s operations and spearhead the overall US growth strategy.

Valuation: Sum of the parts suggests upside

On an EV/sales multiple of 1.3x in FY21e, Checkit trades at a significant discount to the UK software sector (5.7x forward 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 FY21e multiple for Checkit Connect and 1x for Checkit BEMS would result in a valuation of 72p per share.

Exhibit 1: Financial summary

£m

2019

2020

2021e

2022e

31-January

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1.0

9.8

13.0

14.1

Cost of Sales

(1.0)

(7.2)

(8.3)

(8.9)

Gross Profit

0.0

2.6

4.6

5.2

EBITDA

 

 

(2.3)

(2.6)

(3.0)

(2.4)

Normalised operating profit

 

 

(4.4)

(5.2)

(3.8)

(3.2)

Amortisation of acquired intangibles

(0.1)

(1.0)

0.0

0.0

Exceptionals

0.0

(10.3)

(0.8)

(0.4)

Share-based payments

0.0

0.0

0.0

0.0

Reported operating profit

(4.5)

(16.5)

(4.5)

(3.6)

Net Interest

0.0

0.1

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(4.4)

(5.1)

(3.8)

(3.2)

Profit Before Tax (reported)

 

 

(4.5)

(16.4)

(4.5)

(3.6)

Reported tax

0.0

0.7

0.0

0.0

Profit After Tax (norm)

(4.4)

(5.0)

(3.8)

(3.2)

Profit After Tax (reported)

(4.5)

(15.7)

(4.5)

(3.6)

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

8.6

89.4

0.9

0.0

Net income (normalised)

(4.4)

(5.0)

(3.8)

(3.2)

Net income (reported)

4.1

73.7

(3.6)

(3.6)

Basic average number of shares outstanding (m)

178

161

62

62

EPS - basic normalised (p)

 

 

(2.48)

(3.10)

(6.05)

(5.21)

EPS - diluted normalised (p)

 

 

(2.48)

(3.10)

(6.05)

(5.21)

EPS - basic reported (p)

 

 

2.31

45.78

(5.81)

(5.85)

Dividend (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

880.0

32.3

8.6

Gross Margin (%)

0.0

26.5

35.8

36.8

EBITDA Margin (%)

-230.0

-26.5

-22.8

-17.3

Normalised Operating Margin

-440.0

-53.1

-28.9

-22.9

BALANCE SHEET

Fixed Assets

 

 

5.0

1.2

1.2

1.2

Intangible Assets

2.9

0.0

0.0

0.0

Tangible Assets

1.7

1.2

1.2

1.2

Investments & other

0.4

0.0

0.0

0.0

Current Assets

 

 

19.5

19.4

16.6

13.1

Stocks

4.3

1.7

2.1

2.2

Debtors

5.1

3.4

3.4

3.6

Cash & cash equivalents

10.1

14.3

10.5

7.1

Other

0.0

0.0

0.6

0.2

Current Liabilities

 

 

(7.9)

(5.6)

(6.0)

(6.2)

Creditors

(7.6)

(5.1)

(5.5)

(5.7)

Tax and social security

(0.3)

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

Other

0.0

(0.5)

(0.5)

(0.5)

Long Term Liabilities

 

 

(0.3)

(0.7)

(0.7)

(0.7)

Long term borrowings

0.0

0.0

0.0

0.0

Other long term liabilities

(0.3)

(0.7)

(0.7)

(0.7)

Net Assets

 

 

16.3

14.3

11.1

7.5

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

16.3

14.3

11.1

7.5

CASH FLOW

Op Cash Flow before WC and tax

(2.3)

(2.6)

(3.0)

(2.4)

Working capital

(0.5)

(1.0)

0.0

(0.2)

Exceptional & other

9.1

4.3

(0.8)

(0.4)

Tax

(0.5)

(0.5)

0.0

0.0

Net operating cash flow

 

 

5.8

0.2

(3.7)

(3.0)

Capex

(2.2)

(1.6)

(0.3)

(0.3)

Acquisitions/disposals

1.3

84.2

0.2

0.4

Net interest

0.0

0.1

0.0

0.0

Equity financing

0.0

(77.9)

0.5

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

(0.5)

(0.5)

Net Cash Flow

4.9

4.2

(3.8)

(3.4)

Opening net debt/(cash)

 

 

(5.2)

(10.1)

(14.3)

(10.5)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(10.1)

(14.3)

(10.5)

(7.1)

Source: Checkit, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Checkit and prepared and issued by Edison, in consideration of a fee payable by Checkit. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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

General disclaimer and copyright

This report has been commissioned by Checkit and prepared and issued by Edison, in consideration of a fee payable by Checkit. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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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