Company Overview: Mach7 Technologies Limited (ASX: M7T) is engaged in the development of solutions & products for a detailed internal view of the patient. This aids to inform about the precise diagnosis, reduce care delivery delays and costs, and improve patient results. It provides enterprise imaging solutions for healthcare groups and operates predominantly in the United States, Asia-pacific, and the Middle East region.

M7T Details

Impressive Growth in Sales Orders on the Back of Key Contract Wins: The Group has updated on 28 September 2021, that it has received purchase orders from Trinity Health for its Mach7 Enterprise Imaging Platform, eUnity Diagnostic Viewer, eUnity Enterprise Viewer, and Mach7 Universal Worklist.

• The initial purchase orders have a combined value of $3.6 million for software and services and are expected to be recognised in FY22.
• The contract will contribute a further $3.8 million in support fees over the next seven years, once the software is deployed at Trinity. This will take the initial value of the total contract to $7.4 million.

Business Updates from Q1FY22:

The company reported decent performance during the period and won several key sales orders. This also includes contract expansions from two of its major customers, Trinity Health and Advocate Aurora Health. Sales were further supported by orders from a new client, St. Luke’s Boise.

• The company reported sales orders of $16.2 million (TCV) during the period, reflecting a robust increase of 368% on Q4FY21, which stood at $4.4 million. The growth has been aided by license wins from Advocate Aurora Health, Trinity Health, and St. Luke’s Boise.
• Increased traction in sales during the quarter has contributed a further ~$1 million to the company's Contracted Annual Recurring Revenue (CARR), which stood at $16.8 million as of Q1FY22 end, compared to $15.8 million as of Q4FY21 end.
• There has been an operating cash outflow of $1.9 million in Q1FY22, reflecting the low cash receipts during the period. This can be mainly attributed to the high weighting of annual renewals, which fall in the second half of the financial year. M7T further expects cash collections from recent order wins to flow in from Q2FY22 onwards.
• It ended the period with a cash balance of $17.2 million as of 30 September 2021.

Trend in Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 42.49% 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 11.06% and 10.41%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company posted improved gross margin performance at 96.9% in FY21, compared to 87.2% in FY20. It has maintained cash cycle days at an impressive negative 446.2 days in FY21, down from negative 63.6 days in FY20.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Commercialisation Risk: The Group is prone to the risk that it might not be able to commercialise its innovations due to varied unknown variables.
• Competition Risk: Its line of business is also exposed to stiff competition from other players in the space, which might impact the market share of the company.
• Regulatory Risk: The sector is also under the strict purview of regulatory bodies, and the adverse impact of regulatory decisions might have a direct impact on the profitability of the company.

Outlook: The company’s top-line has been bolstered by the decent performance in Q1FY22, and it remains on track to achieve its near-term target of $27 million in revenue for the calendar year 2021. M7T is also set to deliver superior revenues in FY22, compared to ~$19 million in FY21. It also anticipates delivering a positive EBITDA for FY22. The Group is currently tracking at $13.4 million of ARR for FY22. It expects a contribution of a further $3.4 million per annum in ARR in FY23 and beyond.

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: The company has updated that it will hold its 2021 AGM on 11 November 2021. As per ASX, the stock of M7T is trading below its 52-weeks’ average levels of $0.875-$1.590. The stock of M7T gave a negative return of ~25.31% in the past six months and a negative return of ~10.89% in the past one month. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average EV/Sales, considering the decrease in liquidity position, uncertain trading conditions due to the impact of COVID-19, and presence of stiff competition in the sector. For the purpose of valuation, few peers like Nanosonics Ltd (ASX: NAN), 4DMedical Ltd (ASX: 4DX), PainChek Ltd (ASX: PCK) have been considered. Considering the expected upside in valuation & current trading levels, robust growth in sales orders, strong balance sheet, optimistic outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.89, (as on 02 November 2021, 11:40 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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