K2fly Limited - Positioned for Operating Leverage >FY23
K2fly Limited
Positioned for operating leverage >FY23
K2fly Ltd (ASX:K2F) has reported its FY22 results which follows on from the 4C data released in July. Revenues growth was in-line with forecast at $10.1m (+44%), with TCV and ARR already disclosed at $17.8m (+80%) and $6.0m (+76%) respectively. Gross profit was lower than forecast due to the mix between SaaS and consulting/implementation, with several large-scale implementations in FY22. We still see a step change in GP% over FY23 aided by the ARR starting base of $6.0m. Underlying operating costs were slightly above forecast and ~60% above the pcp as a significant investment was made in capabilities to accelerate product growth. We see some stabilisation of the cost base in FY23 but it will be dependent on market opportunities. FY23 will see the launch of a new Resource Governance Platform, effectively upgrading the existing RCubed solution while making adoption of other solutions within the K2F portfolio easier. The platform will also integrate with Maptek’s 3D geological modelling, mine design and production planning software Vulcan, which is also used by many existing and potential clients of K2F.
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 an annual recurring licence payment typically made in advance (SaaS fees). Contract durations range between 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.
Well positioned for further growth
A starting ARR of $6.0m and the promise of more contracts provides a good base for gross margin improvement in FY23 (we have margins improving 1,100bps to 58%). The cost base was dramatically increased in FY22 (+60%) in readiness for revenues growth, which offers further operating leverage at the EBITDA line. The launch of an upgraded Resource Governance Platform and integration with Maptek’s Vulcan platform supports further contract wins and an easier process for new solutions adoption.
Valuation of $0.48/share or $84m market cap
Near-term gross margin/EBITDA revisions have been offset by medium-term reductions to our working capital assumptions as key clients continue to pay in advance, resulting in an increase in our DCF valuation from $0.46/share to $0.48/share. Our DCF incorporates a WACC of 11.3%, CAGR revenues growth over the forecast period of 33%, medium-term growth of 12%, SaaS reaching 80% of total revenues (from 44% in FY22) and gross margins peaking at 70% (from 47% in FY22). Current EV/ARR metrics are undemanding at ~3.7x FY22, particularly considering half of the group’s solutions have been in the market for less than three years.
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