FINEOS Corporation Holdings PLC

FCL Details

FINEOS Corporation Holdings PLC (ASX: FCL) offers core systems (FINEOS platform) for the accident, life, and health insurance carriers globally, with the top carriers in Australia and the U.S.

Q4FY21 Highlights:

• Acquired Spraoi: During the quarter, FCL acquired Spraoi, a provider of machine learning capabilities for the life industry and Employee Benefits. With this acquisition, FCL has added eight clients of Spraoi.
• A Decline in Cash Receipts: The company generated €22.7 million cash receipts from customers in Q4FY21, down by 15% QoQ.
• New Clients: FCL secured a deal with American Public Life Insurance Company, U.S. for FINEOS New Business and Underwriting, and signed up with Beneva in Canada for its FINEOS Platform.
• Escrow Securities Release: The associates of Michael Kelly, the CEO and Executive Director, hold 85.17 million securities which are subject to voluntary escrow. These shares will be released after the declaration of FY21 results.
• Closing Cash Balance: FCL held a €13.3 million lower cash balance as of 30 June 2021 versus €27.4 million as of 31 March 2021. The decrease was due to the acquisition completed in May 2021, forex headwinds, and the timing of cash collection in early July (after the Q4FY21 close).

Total Revenue & Net Income from 2HFY19-1HFY21; (Analysis by Kalkine Group)

Key Risks:

• COVID-19 Impact: The company may be affected by the resurgence of COVID-19 as the insurance industry has witnessed the immense impact of the pandemic previously also.
• Forex Headwinds: FCL faces the impact of adverse forex changes on its cash flows and fair valuation of financial instruments.

Outlook:

• FCL expects total revenue in the range of €102-105 million, factoring in the forex impacts and Limelight Health’s contribution in FY21.
• The company confirms a 30% growth in subscription revenue before considering the revenue contribution from Limelight Health (~€4 million estimated) for FY21.
• The acquisition of Spraoi is expected to be earnings accretive to FCL’s exclusive of the transaction costs, after completion of first year of acquisition.
• FCL is set to declare its FY21 results on 26 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: The stock of FCL gave a negative return of 16.34% in the past six months and a negative return of14.24% in the past nine months. The stock is currently trading lower than the 52-weeks’ average price level of $3.360 - $5.750. The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers’ average, considering its new client wins in North America, the expected acquisition benefits from Spraoi, and growth in subscription revenue in FY21. For the purpose of valuation, few peers like Infomedia Limited (ASX: IFM), Integrated Research Limited (ASX: IRI), Hansen Technologies Limited (ASX: HSN), and others have been considered. Considering the current trading levels, new client wins in the US and Canada, the expanded client base and product capabilities via Spraoi, valuation, and decent outlook for FY21, we give a ‘Buy’ rating on the stock at the market price of $3.430 as on 23 August 2021, 12:56 PM, (GMT+10), Sydney, Eastern Australia.

FCL Daily Technical Chart, Data Source: REFINITIV  

Aroa Biosurgery Limited

ARX Details

Completion of SPP: Aroa Biosurgery Limited (ASX: ARX) is a soft-tissue regeneration firm engaged in manufacturing, selling, and distributing surgical and medical products. On 23 August 2021, ARX closed the share purchase plan (SPP) offered to its eligible shareholders in Australia and New Zealand.

• SPP Offer: ARX opened the offer on 4 August 2021 and closed it on 19 August 2021. ARX allowed the shareholders to subscribe for up to 15,000 fresh shares at $1.165 per share and received ~$400,000 applications for the new ordinary shares.
• Use of Funds: The funds raised from the SPP (and a recently closed $47 million Placement) will be deployed in the US commercial operations, product pipeline, & R&D, and increasing the cash on the balance sheet.
• Under the SPP, ARX will allot the new shares to applicants on 25 August 2021 and will rank the new shares at par with the existing fully paid issued shares. The new shares will start trading on the ASX from 26 August 2021.

Improved Results with the Endoform^TM Natural: On 10 August 2021, ARX declared the significant improvement in the time of wound closures for diabetic foot ulcers (‘DFU’) and higher probability of wound closure with its Endoform™ Natural, relative to the wound treatment with a traditional collagen dressing.

June 2021 Quarter Highlights:

• ARX recorded NZ$5.3 million of cash receipts in Q1FY22 due to the timing of payments and product shipments, however, in sync with the management expectations.
• The net cash outflows from operations stood at NZ$2.7 million in Q1FY22.
• The company held NZ$31.4 million of cash on hand as of 30 June 2021.

Total Revenue from FY19-FY21; (Analysis by Kalkine Group)

Key Risks:

• Regulatory Risks: The company operates in a highly regulated industry (Pharma and Biotech), hence, subject to approval delays for launching new products and markets.
• COVID-19 Impact: ARX witnessed the impact of COVID-19 on its product sales owing to the cancellation of elective surgeries and the closure of outpatient clinics.

Outlook:

• ARX confirms the product sales guidance between NZ$30-33 million (up by 39%-53% YoY), gross margin above 70% and a negative EBITDA for FY21.
• ARX expects TELA Bio, its US commercial alliance, to deliver revenue growth of 48%-65% YoY in CY21 and a sustained increase in the US medical procedure figures. ARX assumes an average forex (NZD/USD) rate of US$0.72.
• The company plans to construct an expanded manufacturing facility to generate NZ$100 million in revenue per year. ARX estimates to complete the construction to cater to the increased demand by March 2022.

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 stock of ARX gave a negative return of ~12.28% in the past three months and a negative return of ~14.46% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.970 - $1.550. The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). However, the company might trade at a slight discount than its peers’ average, considering the lower revenue, higher normalised EBITDA loss in FY21, and continued negative EBITDA forecast in FY22. For the purpose of valuation, few peers like Next Science Limited (ASX: NXS), CSL Limited (ASX: CSL), Clinuvel Pharmaceuticals Limited (ASX: CUV), and others have been considered. Considering the current trading levels, higher product sales guidance for ARX in FY21, revenue growth expected for TELA Bio in CY21, valuation, and associated risks of forex changes, regulatory risks, and COVID-19 uncertainty, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.035 as on 23 August 2021, 12:31 PM, (GMT+10), Sydney, Eastern Australia.

ARX Daily Technical Chart, Data Source: REFINITIV  

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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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