Craneware Plc (LON: CRW): Significant proportion of recurring revenue and healthy sales pipeline.

Craneware Plc is an FTSE AIM 100 Index listed company, focused on the licensing and development of computer software for the healthcare industry. CRW is serving around one-third of registered hospitals in U.S. It is a market leader in the value cycle solutions that assist hospitals in enhancing its financial performance. The Company is headquartered in Edinburgh, Scotland with offices in Atlanta and Pittsburgh. It currently employs around 350 staff.

CRW will announce its interim results for six months ended 31 December 2020 on 01 March 2021.

(Source: Company Website)

Growth Prospects and Risk Assessment

The Company had delivered a decent growth in its top-line and bottom-line business during H1 FY21, reflecting an optimistic sales momentum. CRW would continue to serve its customers by providing them with efficient technology to enhance their operational performance. It is already an integral part of the US healthcare market and will grab further market opportunities to strengthen its sales pipeline. The robust financial position is illustrated by the product expansion strategy, a significant proportion of recurring revenue and a healthy sales pipeline. The rising usage of efficient technology in the US healthcare industry would provide a boost for the sales of the Company.

However, the performance can be significantly impacted by the principal risk of security of customer and commercial data, compliance management, Intellectual property risk, political and macroeconomic disruptions, competitive landscape, market consolidation and acquisition risk. The Group is also exposed to the risk of foreign exchange currency fluctuations and the Covid-19 pandemic uncertainty.

Industry Outlook Dynamics

With reference to the report from Absolute Markets Insights, the United States Healthcare Cloud Computing Market is expected to grow at a CAGR of 17.4% and reach USD 30.23 billion by 2027. The growth is particularly driven by rising usage of Software as a Service (SaaS) models by healthcare organisations. The cloud computing technology is much required for the healthcare industry as it will bring highly efficient data solutions for the industry, which remain burdened with a large quantity of data. 

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Craneware Plc.

A Glimpse of Business Segments and Key Performance Indicators (FY20)

Trading Update (for the six months ended 31 December 2020, as on 20 January 2021)

• Despite a volatile dollar exchange rate and covid-19 crisis, the Company delivered a strong performance in H1 FY21, with the growth of more than 5% in both the revenue and adjusted EBITDA.
• It saw an increased sales momentum, with more than 90% customer retention rate and returned the dollar renewal rate of customers at around 100%.
• Craneware secured new H1 FY21 sales at a significantly higher level than in H1 FY20.
• The Company maintained its R&D costs and continues to invest in the expansion.
• It delivered ongoing cash conversion rate more than 100%, supported by healthy cash reserves.
• For the full year ending 30 June 2021, the Company is confident that it will deliver the positive performance and expects to meet current market expectations, with significant new sales pipeline opportunities.
• Moreover, the Company is looking to achieve double-digit growth.

Q1 FY21 Trading Update (for the three months ended 30 September 2020, as on 19 October 2020)

• In the first quarter of 2021, the Company saw a return to strong sales and was in line with the outlook (released in FY20 results). The sales in Q1 increased as compared with the corresponding period of the last year.
• Overall, the Board is confident in the continued strong performance of the business.
• It continues to see substantial new opportunities entering the sales pipeline and while cognisant of the ongoing pandemic.

Financial and Operational Highlights (for the year ended 30 June 2020 (FY20), as on 21 September 2020)

(Source: Company Website)

• The Company made good progress in FY20 and revenues remained consistent at US$71.5 million (FY19: US$71.4 million).
• Total Sales for the financial year 2020 were ahead of the prior year at US$65.4 million (FY19: US$63.1 million).
• It saw an increase of 5% year-on-year in adjusted EBITDA.
• On a year-on-year basis, the profit before tax surged by 5%, basic adjusted EPS increased by 3% and basic EPS was up by 12%.
• The Company maintains a strong balance sheet, with no debt, cash reserves consistent with the end of the prior year and Total Visible Revenue for the next three years of US$200.1 million.
• In FY20, the capitalised R&D declined to US$9.3 million (FY19: US$9.6 million), despite an overall increase in the R&D spend.
• It witnessed a healthy sales mix, with 90% of sales being to existing customers or new hospitals.
• The Board has paid a final dividend per share of 15 pence (18.45 cents), giving a total dividend per share for the year of 26.5 pence (32.60 cents).

Financial Ratios

Share Price Performance Analysis

   (Source: Refinitiv, chart created by Kalkine Group)

On 11 February 2021, at the time of writing (before the market close, at 8:06 AM GMT), Craneware Plc shares were trading at GBX 2,238.00, up by 1.72% against the previous day closing price. Stock 52-week High was GBX 2,450.00, and Low was GBX 1,300.00, respectively.

From the technical standpoint, 100-day SMA (1,969.87) and 100-day EMA (2,061.21) support the upside potential.

In the last six months, Craneware Plc’s stock price has delivered a return of ~32.05% as compared to a ~26.01% return of FTSE AIM 100 Index and a negative ~4.25% return of FTSE All Technology index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

Craneware had delivered resilient business performance during H1 FY21 despite various challenges like Covid-19 pandemic and volatile dollar exchange rate. CRW had reported growth in its revenues and adjusted EBITDA during H1 FY21. The Board remained confident of carrying that positive momentum into H2 FY21 as well and continue to seek out favourable market opportunities with an objective to grow its sales pipeline. CRW would invest in the expansion of Trisus (cloud-based financial and operational performance platform). CRW expected its Research & Development cost to remain at the same levels as that in its prior periods. As per the market expectations, CRW would achieve revenue ranging from USD 71.5 million to USD 76.0 million and adjusted EBITDA ranging between USD 23.7 million and USD 27.0 million during FY21. The Company had high transparency regarding its next three years revenue as it generates most of its revenue through the recurring stream.

(Source: Company Report)

Considering a decent performance in H1 FY21, high levels of recurring revenue, improvement in operational efficiency and margin, robust balance sheet and undrawn debt facilities, paying dividend to shareholders currently, robust financial position, solid liquidity position, higher profitability margins, Total Visible Revenue for the next three years of USD 200.1 million, less leveraged Company, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Craneware Plc at the current price of GBX 2,238.00 (as on 11 February 2021, before the market close at 8:06 AM GMT), with lower-double digit upside potential based on 11.99x EV/NTM Sales (approx.) on FY21E sales (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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