K2fly Limited - First BHP Contract Adds Sugar to the Quarterly
K2fly Limited
First BHP contract adds sugar to the quarterly
K2fly Ltd (ASX:K2F) has announced its first contract with BHP, a one-year total contract value (TCV) of $2.1m to use its ground disturbance solution for BHP’s Pilbara iron ore division. With ARR of $620k, a three-year contract would represent a TCV closer to $3.4m by our estimates and equal the largest contract ever signed by K2F. Since the December half-year K2F’s ARR has increased 20% (to $5.8m) with the signing of contracts with South32 (Decipher), Freeport McMoRan (RCubed) and now BHP to exceed our June-2022 forecast of $5.4m. This is a significant contract as history says more modules are likely to be adopted by BHP (Rio now uses five of K2F’s nine modules). The other key event over the March quarter was a placement to Maptek, a hardware/software solutions provider to the global mining industry. Maptek becomes the largest shareholder (13.2%) with board representation, and should offer significant collaboration opportunities. This collaboration, together with the additional funding for new product development and sales, supports our medium-term growth assumptions. Our valuation remains unchanged at $0.55/share, with recent contracts supporting current medium-term estimates.
Business model
K2F licenses software together with associated consulting and implementation services to large/enterprise mining companies around the world. Key software products centre around mineral resources and reserves governance (RCubed), community and heritage/land access (Infoscope), mining technical assurance (Sateva), and rehabilitation and tailings management (Decipher). 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.
First BHP contract announced post quarterly
K2F has announced its first contract with BHP, a one-year $2.1m TCV (~$3.4m three-year equivalent) to use the ground disturbance solution for its iron ore operations in the Pilbara. Given the $1.5m implementation fee we would expect this contract will be renewed on a longer-term basis. The importance of this contract cannot be underestimated, with Rio as an example now using five of K2F’s nine solutions following an initial contract for the Rcubed solution in November 2019. The opportunity to expand business with the global majors stems from both modules, regions and commodities.
Valuation of $0.55/share or $96m market cap
Our DCF valuation remains $0.55/share incorporating accelerated revenues growth assumptions enabled by the recent capital raise and new shareholder (Maptek). The DCF incorporates a WACC of 10.4%, CAGR revenues growth in 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 ~4.7x YTD FY22, particularly considering half of the group’s solutions have been held for less than two years.
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