CV Check Ltd - Another Solid Cashflow Positive Quarter, and Buy-Back
CV Check Ltd
Another solid cashflow positive quarter, and buy-back
monitoring and management technology and services (i.e. ‘Know Your People’ services). CV1 has released its Q4 FY22 reports revealing: (1) For FY22: $29.1m cash receipts (up 71% on pcp and including ~$1.1m aged receivables collections), 64% P&L gross margin (up five percentage points on pcp), $3.1m operating cashflow, $260k free cashflow (post $2.8m capitalised product development spend and capex), $12.2m cash (and net cash); and (2) For Q4: $7.4m cash receipts (up 17% on pcp and surpassing the 6% yoy revenue growth), $1.0m operating cashflow and $53k free cashflow. CV1’s cashflow performance also compares favourably to its ASX-listed peers. As expected, CV1 reiterated its FY23 focus on significantly growing SaaS revenue from its workforce compliance offering (‘Cited’) following the launch of real-time monitoring functionality and the OnCite app. Separately, CV1 announced an on-market share buy-back with a maximum $2m outlay (3.4% of issued shares at latest $0.135 close). This leverages its strong cash position, signals confidence in its business model, and should serve to underpin the share price. Meanwhile, recent M&A activity in CV1’s ASX-listed peer group reinforces our view that it is well placed for potential deals. See CV Check RaaS Update 20 July 2022.
Business model
CV1 has two core offerings: (1) Screening and verification (SaV) services via its CVCheck platform (91% FY22 revenues); and (2) A Software-as-a-Service (SaaS) real-time workforce compliance monitoring and management platform (9% FY22 revenues). SaV services generate transactional revenues with fees charged per check on a PAYG basis. They are targeted at business, skewed to police checks, and somewhat leveraged to the employment market. For SaaS, customers (employers) pay a fixed monthly fee plus transactional fees for SaV and other services. CV1 is now moving its SaaS pricing to a simple monthly all-in fee per worker of $15-$30 (inclusive of transactional services, minimum 12-month subscription).
Q4 FY22: Solid cashflows conclude strategic transition year
As expected (given the 11 July disclosure), CV1 has released a solid Q4 FY22 cashflow report disclosing the following new information: (1) FY22 cash receipts of $29.1m (up 71% on pcp) vs. revenues of $26.4m [up 51% on pcp with est. growth split of 28% organic/23% Bright People Technologies (‘Bright’) acquisition]; (2) $260k FY22 free cashflow; (3) Q4 cash receipts of $7.4m (up 17% on pcp) vs. $6.7m Q4 revenues (up 6% on pcp – all organic growth); (4) Q4 free cashflow of 53k; and (5) 64% FY22 gross margins (up 5 percentage points on pcp). CV1’s FY23 focus lies in significantly growing SaaS revenues, while concurrently extracting process and automation-related efficiencies. In light of the cashflow performance, strong $12.2m cash balance and its view of the business model and share price, CV1 has decided it may deploy up to $2m to buy-back shares over 12 months (3.4% of issued shares at $0.135). This would be a sound use for a modest portion of cash while retaining flexibility to pursue M&A.
DCF valuation of $0.26/share or $112m market cap
Our CV1 DCF valuation is $0.26 per share (11.6% WACC). This implies EV/Revenue multiples of 3.8x for FY22 and 3.3x for FY23. As a cross-check, CV1 is currently trading at a 52% discount to its ASX-listed peers on FY22f EV/Revenue (1.8x vs. 3.6x) and a 31% discount to the US- listed SaV pure-plays (2.6x CY22f EV/Revenue). Further, applying revenue multiples implied by Deel Inc’s Paygroup (ASX:PYG) acquisition (2.9x ARR/4.3x FY22a revenues) and Accel- KKR’s indicative offer for ELMO Software (ASX:ELO) (5.6x FY22a/4.4x FY23 est. revenues) to CV1 gives equity values of $0.20-$0.37 per share. While the buy-back should underpin the share price in FY23, key re-rating catalysts are: (1) Securing material new SaaS contracts; and (2) Evidence of automation-related margin enhancements and operating leverage.
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