Company Overview: Mach7 Technologies Limited (ASX: M7T) is engaged in developing data management solutions that create a clear view of the patient and aids in better diagnosis. It provides medical imaging software and services for healthcare companies in the United States, Asia-Pacific, and the Middle East region. It reports its revenue under the following segments- sale of software licenses and professional services (implementation & training, data migration, support & maintenance services).

M7T Details

Increased Traction in Contract Renewals & Expansion Agreements: The company specialises in developing innovative imaging solutions for healthcare providers. It has reported increased traction in new sales orders, contracts and also witnessed several contract renewals across a wide suite of its product offerings. Some of its key customers and reseller partners comprise of Cabell Huntington Hospital, Adventist Health West, St. Paul’s Hospital (Hong Kong), University of Vermont Medical Center (UVM), Marshfield Clinic, and University of California San Francisco Health (UCSF).

License of Product:

On 19 July 2021, M7T has announced that it has licensed its eUnity universal viewing solution to Advocate Aurora Health.

• The contract is valued at $4.3 million and comprises of a software license fee, professional services.
• The initial tenure of support will be for a period of five years, with a provision for volume expansion pricing. The contract can also be extended as per the requirements of AAH.
• M7T expects to recognise $1.5 million to $1.7 million of revenue in FY22, and the remainder from FY23-27.

FY21 Business Update:

It delivered impressive performance in FY21 and reported its highest ever cash receipts from customers.

• Increase in Cash Receipts: Cash receipts grew by ~23% to ~$21 million in FY21, compared to the prior year. This has driven the cash flow performance and posted positive operating cashflows of $1.21 million during the year.
• Rise in Sales Orders: The company received sales orders of $25.64 million in F21, reflecting an increase of ~95% over FY20.
• Decent Customer Base: The customer count stood at 165 during the period end.

The company has delivered sales orders of $4.4 million during Q4FY21 and cash receipts of $4.6 million. The operating cash flow stood at a near breakeven level of negative ~$0.06 million in Q4FY21. It ended the period with a strong balance sheet having a cash position of $18.36 million and no debt as of 30 June 2021.

Cash Balance Trend (Source: Analysis by Kalkine Group)

New Customers, Renewals & Expansion to Drive Growth: The company has signed new sales orders and contracts, which will give revenue comfort going forward. Some of the new customer agreements and expansion works are mentioned below:

• Cabell Huntington has expanded the Mach7 solution to a new facility, St. Mary’s Medical Center, which is the second-largest medical facility in the West Virginia-Ohio-Kentucky region.
• Mach7 has also been licensed for a remote reading solution in St. Paul’s Hospital in Hong Kong.
• UVM has added the eUnity enterprise viewer to its existing Mach7 solutions.

It has also made steady progress in the deployment of its solutions at the customer sites, with several of them reaching go-live status.

Decent Uptrend in ARR Levels: ARR has more than doubled for the company at $13.36 million in FY21 when compared to the prior year, which was at $6.51 million. M7T expects the ARR to continue to grow as existing customers become fully deployed and increased licensing of products from new customers. As per the company, the ARR covers ~65% of its annual operating costs.

Top 10 Shareholders: The top 10 shareholders together form around 38.79% of the total shareholding, while the top 4 constitute the maximum holding. JM Financial Group Ltd.  and Clime Investment Management Ltd are holding a maximum stake in the company at 11.09% and 9.21%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improvement in its gross margin to 95.1% in H1FY21, compared to 90% in the previous corresponding period. ROE stood at negative 13.1% during the period.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company’s operations subject it to a number of risks which are outlined below-

• Technology Risk: It depends on its technological and research expertise to deliver impactful products. Any disruption in the technological space might impact the revenue-generating ability of the company.
• Peer Competition: The company’s line of business makes it prone to stiff competition from related peers, who are focused on increasing its market share.
• Regulatory Risk: The Group's performance can be impacted based on the change in regulations by the Governments at domestic and international levels.

Outlook: M7T expects its revenues to be between $19 million and $19.5 million in FY21, reflecting growth of ~15% over FY20. It also anticipates double-digit revenue growth in FY22, driven by the rollout of Adventist Health, Trinity Healthcare contracts and further strengthened by the recent expansion order from Advocate Aurora Healthcare. The appointment of Mr. David Madaffri as the Senior Vice President of Global Sales is likely to give revenue push to the company going forward. It expects to release its audited FY21 results on 23 August 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  As per a recent update, National Nominees Ltd ACF Australian Ethical Investment Limited has undergone a change of interest in the company and has increased its voting power to 7.55% representing 17,855,057 ordinary shares. As per ASX, the stock of M7T is trading below its average 52-weeks’ levels of $0.870-$1.590. The stock of M7T gave a positive return of ~4.78% in the past nine months and a negative return of ~17.91% in the past three months. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer median EV/Sales (NTM trading multiple), considering the uncertain trading environment due to the prevalence of COVID-19 pandemic and continued lockdowns in its key markets. For this purpose, we have taken peers such as 4DMedical Ltd (ASX: 4DX), Nanosonics Ltd (ASX: NAN), Adherium Ltd (ASX: ADR), to name a few. Considering the expected upside in valuation and current trading levels, decent increase in cash receipts, license of product by Advocate Aurora Health, strong balance sheet and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.975, (as on 27 July 2021, 11:14 AM (GMT+10), Sydney, Eastern Australia).

M7T Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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