PKS Holdings (PKS.ASX) - Price breakout on Volume - What next?

PKS listed 6th June, a 20c IPO, and traded modestly underwater until yesterday. Other than the IPO presentation, there has been no news released since IPO. We participated in the IPO, like the business, and believed they have a good chance of some early revenue wins, in the hands of new management post IPO. It is on my watchlist, and today the stock has broken out, with around 80% of its weekly volume through yesterday after lunch, and up 22%. I participated in the PKS  IPO because it screens cheaply compared to Healthcare Tech peers, like VHT, and is sensitive to additional revenue wins through its white-label relationship with Abbott Laboratories and direct sales channel.

So for those who have never taken a look at PKS, a quick background and my view on earning sensitivities. (note - I have not met with management since before the listing). 

Weekly Ave volume is 7.5m shares

Yesterday's vol was 5.19m shares (90% in the afternoon session)

About PKS - Small but profitable healthcare tech business with very sticky clients. Global Rollout Opportunity.

PKS provides a proprietary Clinical Decision Support system (CDS) called “RippleDown” which automates the human decision-making process within healthcare organisations based on rules set within the organisation by domain experts.

PKS commercialises its technology directly with customers as well as through its major channel partners - Thermo Fisher, Philips and Abbott. PKS has a strong financial profile with 80% recurring earnings and EBITDA margins of 54% in FY2018 (excluding listed entity costs). PKS generates strong cash flow and has a cash balance of $4.2 million to fund further growth at the time of IPO.

At IPO the market cap was only $24.2 million based on an issue price of $0.20 per share.

Channel Partners are the Key

Channel partners represent the low hanging fruit for PKS early on. At the time of listing they announced: -

"PKS’ channel partners are currently pursuing approximately 250 opportunities. The Company’s major channel partner, Abbott, is currently adding around one new account per month, with the potential to accelerate. PKS and Abbott are negotiating an extension agreement whereby PKS is proposing to invest more into the relationship and in return will receive a higher licence income."

So it is worth breaking down how sensitive they might be to a win with Abbott. (the following is based on my understanding of the Abbott relationship and by no means to be viewed as a forecast)

Currently

1. PKS white labels a licence through Abbott for ~$20k.
2. If we assume each Abbott lead averages 10 licenses, the Abbott channel might have in total 2,500 license opportunities
3. On the current economics, the total opportunity to PKS via Abbott could total $50m (2,500 x $20k)
4. Assume a 10% conversion, that is +$5m (or revenue growth of 128% from FY18)

If they negotiate well with Abbott!

1. PKS white labels a licence through Abbott for ~$40k.
2. If we assume each Abbott lead averages 10 licenses, the Abbott channel might have in total 2,500 license opportunities
3. On the current economics, the total opportunity to PKS via Abbott could total $100m (2,500 x $40k)
4. Assume a 10% conversion, that is +$10m (or revenue growth of 256% from FY18)

The point to make is the future earnings are very sensitive to an increase in the licence fee negotiation with Abbott, as it is a key and already established sales channel. It is also worth noting that if this is a $50-$100m opportunity to PKS, then the opportunity is 5-10x's more value to Abbott, and that is the incentive for them to drive leads! They are currently converting 1 opportunity a month, but conservatively, with additional resources, this could be 2-3 per month.

It is worth noting, from the IPO Presentation -

• Mkt Cap $24.2m (at IPO 20c)
• FY18 Revenue $3.9m.
• FY16 to FY18 revenue CAGR of approximately 13% with little sales resources
• Sticky revenues - maintaining all contracted customers since 2011
• FY18 EBITDA $2.1m.
• EV / underlying FY18 EBITDA 9.4x's
• EBITDA Margin FY16 17%, FY17 38%, FY18 54%
• 80% of revenue is recurring
• Number of installed sites - 112
• Number of direct clients and channel partners - 18
• Offshore revenue as % of FY18 revenue - 60% - sensitive to A$

Summary

This is a really brief introduction to PKS, and a stock I doubt many have come across. I met with management 3 times prior to listing and I did like the opportunity. Thus I own shares and participated in the IPO. When we checked with industry contacts, the feedback is that once the software is in, clients are very sticky. The challenge in converting bigger prospects is can they build it for themselves (for less)? We understand the modest revenue growth in private hands (owned by Family office) is explained by PKS giving exclusivity to Abbott for a few years, whilst they took them through the certification/registration process in the US. Whilst that exclusivity period was in place, they did grow directs sales revenue/accounts, with limited resources in Australia, which is a validation of the product. I declare I do not know what is behind the lift in volume yesterday, however, I always thought they screened cheaply compared to peers when it listed (Volpara VHT.ASX has breast screening diagnostic software, Mkt Cap $366m, post MRS acquisition, forecasts FY20 US$12.8m in revenue and is loss-making). So perhaps it is as simple as the IPO hangover has gone, and someone sees the value. One to watch.


Tom

(Key slides from the IPO Presentation below) 

The author Tom Schoenmaker is a director and portfolio manager at Wentworth Securities. The views are his alone. 

Disclosure - The author of this desk note owns shares in PKS.ASX

Important Note - This note is not a recommendation or advice to buy or sell PKS shares mentioned. PKS shares should be considered very speculative, high-risk, and volatile. There are significant risks inherent in early-stage companies not discussed in this note. You should always seek professional advice before considering any share purchase or sale. This is a desk trading note, and not a research document, and the view of the authors only. Because this note has been prepared without consideration of any specific clients investment objectives, financial situation or needs, your financial advisor should be consulted before any investment decision is made. Wentworth Securities does not accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. Wentworth Securities has not independently verified the information contained in this document.