We see a Q3 report from Kontigo Care, in which the reported figures aligned well with our projections. The top-line continues to be affected by the trimmed municipalities’ budgets and prolonged decision-making cycles. Still, we believe that the top-line in Q3 showed good resilience. We remain cautiously optimistic regarding the near-term outlook as Q4’23 seems to be off to a good start with 30 new activated licences and a slightly higher MRR than by the end of Q3. Further, the new AI-based drug product can be a transformative innovation and a game changer for Kontigo Care.

Kontigo Care posted a negative growth rate of 1% y/y and -2% q/q, resulting in net sales of SEK7.1m, marginally below our expectations of SEK7.2m, resulting in a -1% deviation. Work for own use was SEK5.2, above our estimate of SEK1.8m, consequently affecting EBIT positively. EBIT of SEK1.6m was above our -SEK1.9m estimate.

The company signed one new frame agreement with municipalities during the quarter. The total number of municipality contracts now stands at 169, corresponding to c58% of the municipalities in Sweden. The company lost five licenses during the quarter. Consequently, the base of active licenses decreased from 993 to 888 during the quarter. However, since the end of Q3’23, the licence base has increased to 918. MRR (Monthly Recurring Revenue) was flat q/q at cSEK2.4m.

Operating expenses (ex. D&A) amounted to SEK9.6m (6.3), almost on par with our SEK9.7m estimate. The net result of cSEK1.5m was impacted by one-time costs amounting to SEK0.3m related to the mandatory adaptation to the regulatory framework in MDR requirements. One-time costs for the transition to MDR are expected in Q4’23 as well, but they are anticipated to decelerate from the first quarter of 2024.

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 Q3, Kontigo Care capitalised SEK5.0m for development (mainly derived from the drug monitoring project), while D&A amounted to cSEK1m (amortisation amounted to SEK0.7m). 

Cash flow from operating activities was cSEK3.6m, and cash flow after investments was negative cSEK 1.4m: by the end of the quarter, cash and cash equivalents amounted to cSEK4.7m.
The company has earlier projected that costs related to the drug project and clinical study to range between SEK12m and SEK16m, with a significant portion of these expenses being covered by its cash flows. In Q1’23, the company secured two loans totalling SEK7.0m from financial institutions. Additionally, a proposed directed share issue of approximately SEK9m (before transaction costs) was announced at the beginning of Q4’23. In essence, a total of SEK16m will have been raised (via loans and equity) to support the financing of the drug product project. We acknowledge that further funding may be necessary, depending on the strategic direction of the drug project, which we hope to hear more about when the results from the clinical studies are presented in November.

The near-term outlook is cautiously optimistic as Q4’23 seems to be off to a good start with 30 new activated licences and a slightly higher MRR than by the end of Q3.
Further, the development of Kontigo’s new AI-based service for eye-based drug detection is advancing swiftly. Two clinical studies were conducted during Q2’23 in Leiden, Netherlands, and in the Region of Uppsala. 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 October and November.
A market introduction plan for Previct Drugs is currently in development and will be communicated once all study results are finalised, and the schedule for further product development is determined. Additional patent applications are an integral part of this plan. To date, three distinct patent applications have been filed. 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. The possibility of adding this functionality to Previct will be of great importance for future expansion and growth, especially in terms of markets outside Sweden, where Kontigo Care has been struggling historically.

We have only made minor adjustments to our near-term estimates. We have increased total revenues by 11% in ‘23e due to higher capitalisation and slightly increased OPEX. All in all, leading to positive EBIT ‘23e. Our changes to our estimates 2023-26e are outlined in the table below:

We value Kontigo Care using a DCF valuation based on certain long-term sales growth and margin assumptions. In addition to this, we apply a relative peer valuation. 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 (8.5) per share. Our fair value range is adjusted to SEK1.4 per share to SEK16 (previously: SEK1.6-SEK17). The expected dilution from the proposed directed share issue of cSEK9m is included in our valuation. Our base case is derived from the financial forecasts in the table above and the long-term assumptions outlined in the table below.

The market valuation of Kontigo Care is lower than that of its peers (Nordic SaaS companies) on forward-looking EV/EBIT multiples. We use FactSet consensus estimates for the peers and our estimates for Kontigo Care specifically. The 2024 EV/EBIT for Kontigo Care stands at 8x compared to the peer group’s median of 18x, a c55% discount to its peers. We believe Kontigo Care should trade at a discount because its market cap is lower than its peers, and its expected sales growth is slower in 2023. However, we believe the discount applied to Kontigo Care in ’23e-’25e is too large. To close the valuation gap with its peers, we think that Kontigo Care needs to accelerate growth internationally and locally while also focusing on enhancing cash flows following the potential launch of the drug product.