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

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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
Net Sales	N/A	N/A	N/A	N/A
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.

Financials Q4 2022: Sales

Net sales for the fourth quarter came in at SEK7.2m (6.6m), with EBIT at SEK0.2m, leading to an EBIT margin of 2%. We had forecasted net sales at SEK7.4m – a negative deviation of 3%. The gross margin reached 84%.

Net sales came in flat q/q. The company signed three new framework agreements with municipalities during the quarter, taking its total number of municipality contracts to 154, with 54% of municipalities contracted. It added 50 new licences during the quarter. Consequently, the base of active licences increased during Q4 from 896 to 946.

Financials Q4 2022: Profitability and Cost base

Operating expenses (excl. D&A) amounted to SEK8.4m (6.8). Due to MDR project expenses, the cost base increased more than we anticipated in Q4. In addition, Kontigo Care started marketing its Previct products during the quarter, meaning marketing expenses contributed to the expansion of the cost base. We expect the cost base to stay intact during H1’23 while the MDR project continues.
Cash flows from operating activities were SEK2.1m; by the end of the quarter, cash and cash equivalents amounted to SEK5.7m. We further note that Kontigo has a financing plan for the drug monitoring study, estimating the costs for the project at SEK6.5m–8.5m for H1 2023, financed through its own cash flows, a bank credit, and via ALMI.

Kontigo Care uses capitalisation – i.e., it records an asset (in this case, development costs) on the balance sheet instead of immediately expensing this on the income statement. In Q4, Kontigo Care capitalised 2.6m for development (mainly derived from the drug monitoring project), while D&A amounted to SEK1.1 (amortisation amounted to SEK0.7). EBIT minus capitalisation amounted to -SEK2.4m, whereas reported EBIT stood at SEK0.2m.

Outlook

According to the company, it currently targets about 10% of the potential market in Sweden, leaving plenty of room for growth. However, Kontigo Care mainly focuses on a slow-moving area: the municipalities in Sweden. Even though the Previct products have been proven to increase efficiency amongst therapists and improve treatments, the municipalities are still traditional and look at the licensing costs. Given this, and in combination with a presumed softer municipality economy this year, we estimate a growth rate of around 15% for 2023.

To increase growth further going forward, we believe Kontigo Care must successfully expand internationally. In addition, the regions in Sweden are likely to take over the obligation to provide addiction treatment from the municipalities in 2024. We estimate Kontigo Care to gain momentum from this.

Kontigo Care has already started its communication with some regions and is preparing the necessary upgrades to meet the regions’ regulatory demands (MDR). We believe the potential agreements with the regions will likely include larger volumes of licences. On the downside, the price is likely to be lower than today, given the volumes. Nevertheless, we expect the new reorganisation of responsibilities for addictive care to boost sales in Sweden. The regions are likely to look for eHealth solutions with a proven track record that help therapists become more effective. Regarding internationalisation, we expect results from the collaboration with distributor A-klinikka later this year for the Finnish market. However, this will have a limited effect on the top line.

Estimates

With 2022 in the rear-view mirror, we move our forecast period by one year and make minor adjustments for 2023e. We have lowered net sales from SEK35m to SEK33m, adjusting for a weaker economy for the municipalities in Sweden in 2023. We now forecast 16% net sales growth for 2023, aligned with the growth rate for 2022.

Valuation

We value Kontigo Care using a DCF valuation based on different long-term sales growth and margin assumptions. In addition to this, we apply a relative peer valuation. We use a weighted average cost of capital (WACC) of 11.5%, derived from the Redeye Rating model. Our fair value range is SEK2–19, with a base case of SEK11 per share.

Base Case: SEK11(11)

Our main scenario assumes that Kontigo Care continues executing its growth strategy according to our financial projections, as outlined in the previous section. We estimate a 2023e–2027e sales CAGR of 22%, with an average EBIT margin of 21%. We forecast a sustainable EBIT margin of 18%, with terminal growth of 2%.

Bull Case: SEK19(19)

Our more optimistic scenario is based on a more rapid international ramp-up and improved profitability. We estimate a 2023e–2027e sales CAGR of 25%, with an average EBIT margin of 25%. We forecast a sustainable EBIT margin of 24%, with terminal growth of 2%.

Bear Case: SEK2(2)

In our pessimistic scenario, Kontigo Care underperforms our base case estimates due to slower revenue growth and margin pressure from a lack of internationalisation. We estimate a 2023e–2027e sales CAGR of 13%, with an average EBIT margin of 5%. We forecast a sustainable EBIT margin of 13%, with terminal growth of 2%.

Peer Valuation

The market valuation of Kontigo Care is lower than that of its peers; we use SaaS Peers and the e-health segment, a sub-segment of SaaS. We use FactSet consensus estimates for the peers and our estimates for Kontigo Care specifically. The 2024 EV/Sales for Kontigo Care stands at 2.1x compared to the combined peer group’s average of 2.7x.
We believe Kontigo Care should trade at a discount because its market cap is lower than that of its peers, and its expected sales growth is slower than theirs. However, we argue the discount currently assigned to Kontigo Care is too large, and we expect this to contract once the case becomes more well-known in the market.

Income statement
SEKm	2022	2023e	2024e
Revenues	28.4	32.9	40.8
Cost of Revenue	-7.5	-10.2	-4.4
Operating Expenses	29.1	30.8	31.8
EBITDA	6.8	12.4	13.4
Depreciation	1.3	1.9	1.6
Amortizations	2.6	2.5	7.9
EBIT	2.9	8.0	3.9
Shares in Associates	0.00	0.00	0.00
Interest Expenses	0.02	0.00	0.00
Net Financial Items	-0.02	0.00	0.00
EBT	2.9	8.0	3.9
Income Tax Expenses	0.00	0.00	0.00
Net Income	2.9	8.0	3.9
Balance sheet
Assets
Non-current assets
SEKm	2022	2023e	2024e
Property, Plant and Equipment (Net)	3.1	3.8	5.4
Goodwill	0.00	0.00	0.00
Intangible Assets	19.2	27.4	23.5
Right-of-Use Assets	0.00	0.00	0.00
Other Non-Current Assets	0.00	0.00	0.00
Total Non-Current Assets	22.3	31.2	28.9
Current assets
SEKm	2022	2023e	2024e
Inventories	1.0	0.33	0.41
Accounts Receivable	3.4	4.0	4.1
Other Current Assets	0.85	0.99	1.2
Cash Equivalents	5.6	10.6	14.1
Total Current Assets	10.8	15.8	19.8
Total Assets	33.2	47.1	48.7
Equity and Liabilities
Equity
SEKm	2022	2023e	2024e
Non Controlling Interest	0.00	0.00	0.00
Shareholder's Equity	21.4	29.3	33.2
Non-current liabilities
SEKm	2022	2023e	2024e
Long Term Debt	0.00	0.00	0.00
Long Term Lease Liabilities	0.00	0.00	0.00
Other Long Term Liabilities	0.00	0.00	0.00
Total Non-Current Liabilities	0.00	0.00	0.00
Current liabilities
SEKm	2022	2023e	2024e
Short Term Debt	1.2	6.2	1.2
Short Term Lease Liabilities	0.00	0.00	0.00
Accounts Payable	6.4	1.6	2.0
Other Current Liabilities	4.2	9.9	12.2
Total Current Liabilities	11.8	17.7	15.5
Total Liabilities and Equity	33.2	47.1	48.7
Cash flow
SEKm	2022	2023e	2024e
Operating Cash Flow	7.1	13.4	15.7
Investing Cash Flow	-9.5	-13.4	-7.1
Financing Cash Flow	-0.50	5.0	-5.0

People: 3

Kontigo Care has a competent team of scientists, business developers and sales personnel. Some of the management team have been with the company since the beginning. The core competence is in data science and statistics: Kontigo's AI-driven prediction platform is based on the organising and statistical analysis of a large quantity of data, in order to see patterns and filter out events from the larger trend.

The company culture is characterised by integrity, openness for innovative solutions and long-term committment. The team is driven by the mission to develop a new treatment paradigm for addiction, consisting of a complete support system, tracking of alcohol consumption, and timely intervention, before relapse occurs.

Business: 3

Kontigo Care is a SAAS company, asset-light and easy to scale. Its products consist mainly of machine learning algorythms based on large quantities of data, which are difficult to replicate.

The company offers a clear benefit to its customers: patients, municipalities and therapists. The majority of the revenues are public pay from contracts with Swedish municipalities, which are obliged by law to offer therapy to addicts.

Since Kontigo has so many contracts and clients, it is not directly dependent on any municipality in particular, but it is rather dependent on changes in public policy. Kontigo also partners with Oriola, a corporate health provider in Sweden, to offer Previct to private companies in the framework of corporate health. Kontigo is also diversifying revenues with international expansion in the Netherlands and Finland, at a later stage Germany and the Baltic states.

Kontigo does not have any notable competitors in Sweden, its produces its hardware in Sweden and is not directly dependent on raw materials. The company has improved its gross margin significantly over the past years.

Financials: 2

Kontigo has high revenue growth rate. The company invests heavily in new product development and has high R&D costs, rather than report a profit and pay tax. Kontigo prefers to allocate capital to deveoping new products and establishing new sales channels, to grow the business. Once its new AI-driven drug addiction treatment app is developed, we expect R&D costs to come down somewhat.

Kontigo has high gross margin, around 84%, and it is a capital-light business that can easily scale, without large capital investments. It sells licenses for its software, which have a long duration - most are for 12 months - and paid in advance. The revenues are recurring and the company does not need to raise cash in the near future.

It spends carefully, invests in the most efficient sales channels and does not currently pay dividends.

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