K2fly Limited - A Quarter of Records
K2fly Limited
A quarter of records
K2fly Ltd (ASX:K2F) has released its June quarter 4C which has seen records broken across the board. Cash receipts at $5.4m (+170% on the pcp) and operating cashflow +$1.7m were clear quarterly records. Annualised Recurring Revenues (ARR) reached $6.0m in June 2022, 76% above FY21 and above our $5.8m estimate. Relative to our assessed peer group this represents the highest growth rate over FY22. Cash at bank ended at a record $8.3m, aided by both a recent strategic placement and the seasonally strong Q4 billing cycle. This provides the group with significant runway for product development, with IP spend increasing ~140% over FY21 to $2.7m or ~25% of estimated revenues. Total Contract Value (TCV) ended the year at $17.8m and highlights the typical term of contract agreements being ~3x ARR before option periods. K2F has held-up well over the past quarter with a flat share price against an average 19% decline of the peer group. This leaves K2F sitting at the top-end of EV/ARR metrics for FY22 at 4.2x against a peer average of 2.3x but undemanding in absolute terms considering recent growth relative to the peer group.
Business model
K2F licenses software together with associated consulting and implementation services to large/enterprise mining companies around the world. Key software products address the natural resource governance and ESG issues that mining companies are prioritising and centre around mineral resources and reserves governance (RCubed), community and heritage/land access (Infoscope), mining technical assurance (Sateva), and rehabilitation and tailings management (Decipher). In a number of these areas, K2F’s offering is the world’s only ‘off the shelf’ solution. New contracts typically involve an implementation fee and then annual recurring licence payments (SaaS fees). Contract durations are typically three-to-five years (average 3.4 years) with a strong probability of renewal as they become embedded in the key work processes of clients. Utilising existing client relationships, K2F is looking to increase the number of software solutions a client purchases through product development and marketing.
Q4 FY22 was a quarter of records
The June quarter 4C has produced several financial records including record cash receipts ($5.4m or +167% on the pcp), record operating cashflow ($1.7m), record high cash at bank ($8.3m), record ARR ($6.0m) and record TCV ($17.8m). As a result, total operating cash outflows for FY22 were well below FY21 at $1.0m against $1.65m. While largely as forecast, the business is in a strong position to exceed many of these records in FY23.
Valuation of $0.46/share or $80m market cap
Independent of K2F’s quarterly performance, we have revised our risk-free rate assumptions resulting in a reduction in our DCF from $0.55/share to $0.46/share. Our DCF incorporates a WACC of 11.3%, CAGR revenues growth over the forecast period of 43%, medium-term growth of 12%, SaaS reaching 80% of total revenues (from 38%) and gross margins peaking at 70% (from 46%). Current EV/ARR metrics are undemanding at ~4.2x FY22, particularly considering half of the group’s solutions have been in the market for less than three years. We will revise our forward estimates in detail post the release of K2F’s annual result.
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