X2M Connect Limited - Connecting into Global Utilities Digitisation Trend
X2M Connect Limited
Connecting into global utilities digitisation trend
X2M Connect Limited (ASX:X2M) is an Australian-based technology company focused on digitising the utilities sector across APAC with its proprietary technology. The technology enables a range of devices and sensors to communicate with other devices, capturing data that can be analysed and processed on one platform. The benefits include the replacement of manual processes such as meter reading, the detection of leaks, valuable customer insights and increased public safety. A connection involves an initial sale of hardware and ongoing SaaS monitoring fees per device. X2M currently operates in South Korea, Japan, Taiwan, Australia and has just recently entered the Chinese market and the Australian Energy Management market. Following funding from an IPO in September 2021, device sales have grown strongly in South Korea, Japan and China, with a further $3.7m raise undertaken in July to maintain momentum. These markets remain under-penetrated relative to key client addressable markets, offering sustained hardware and software growth as there is little point having just part of a clients customer base monitored once going digital.
Business model
The X2M business model starts with the sale of a hardware device which enables legacy utility meters or sensors to communicate with an Internet of Things (IoT) platform. This sale historically has been at gross margins between 10% and 25%. A monthly SaaS software fee is then charged for each device in the field for the ongoing reading and monitoring of data from the meter, together with a monthly maintenance fee. The average yearly SaaS fee across all regions is currently ~A$3.40 with gross margins between 60% and 90%. Additional functionality is being developed and deployed to increase this yearly fee over time. The benefits for utility companies include the detection of leaks, a reduction in manual reading and increased customer insights while for end customers improved public safety and overall customer service are key benefits. In some regions a licensing-only model is employed where the customer provides all hardware and marketing and X2M the SaaS services.
Device sales have accelerated in recent quarters
Funding received from an IPO in September 2021 has enabled a step-change in device sales across key regions. Connected device sales (ex-China) to June 2022 are up 99%, with growth particularly strong in South Korea (+86%) and Japan (+133%). While China is not included in the device count, we estimate at least a two-fold increase in device numbers on the ground. Recent tender wins have seen contracted revenue for FY23 already reach $11.0m, more than the entire FY22 revenue ($10.4m). These device sales transfer to ongoing SaaS fees in future years, increasing the percentage of recurring revenues within the group. A term sheet signed for the energy management of new greenfield estates signed with Resi Ventures in Australia will see a new hardware/software revenue stream from FY23.
Valuation of $0.27/share or $55m market cap fully diluted
We have selected a DCF methodology to value X2M given the early stages of market penetration and current loss-making position. The resulting valuation is $0.27/share, with the biggest assumptions being device numbers in the field (including China) reaching 1.6m by FY25 and the recent Australian Energy Management initiative reaching 7.5k housing blocks (or equivalents) per annum by FY25.
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- X2M Connect Limited - Connecting into Global Utilities Digitisation Trend06 Sep 2022