Kin and Carta PLC

Kin and Carta PLC (LON: KCT) is an FTSE All-Share index listed United Kingdom-based entity that offers digital transformation services.

Rationale for Valuation – SPECULATIVE BUY at GBX 267.75

• Responsible Business: On 1 December 2021, KCT announced that it has become a first business on the LSE to achieve global B Corp Certification.
• Robust Guidance: KCT had raised FY22 organic net revenue growth guidance from 20% year-on-year growth to approximately 30%. Moreover, the Company expects to switch into net cash position during FY22 to fund further acquisitions.
• Significant Backlog: The Company had shown a robust year-on-year growth of 31% in the backlog value to £78 million at the end of September 2021
• Technical Indicator: From a technical standpoint, the 14-day RSI (~32.32) is in the oversold zone, while the price has gone below the lower Bollinger Band.
• Outperformance Against Benchmarks: The stock price of KCT had delivered around 83% returns over the last one year, and it has outperformed the FTSE All-Share index.
  

Key Risks

• Macroeconomic Instabilities: As Federal meeting minutes indicated an early interest rate hike amid rising Covid-19 cases, it can extend the global equity selloff.
• Pandemic Induced Restrictions: Due to the concerns induced by Omicron variant, travel restrictions can have an impact on new business and pipeline opportunities.

Financial and Operational Highlights (for twelve months ended 31 July 2021 as of 26 October 2021)

 (Source: LSE Website)

• Decent Revenue Growth: The adjusted net revenue from continuing operations grew by around 12.50% from £125.7 million during FY20 to £141.40 million for FY21.
• Robust Growth in Profitability: On the profitability front, the adjusted profit before tax rose by around 61% to £13.0 million during FY21.
• Strengthening of Balance Sheet: With regards to the balance sheet, the Company had shown a significant reduction in the net debt to £19.20 million as of 31 July 2021, while it had reported a net debt of £31.60 million at the end of FY20.

One Year Share Price Chart

   (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion 

The Company managed to increase the number of clients having more than £1 million of annual net revenue from 19 during FY20 to 30 in FY21. Meanwhile, the Company had shown strong growth of around 50% in the year-end backlog for FY21 when compared with the prior-year levels. The stock made a 52-week High and Low of GBX 359.00 and GBX 133.28, respectively.

Based on the strong revenue guidance for FY22, several new contracts, improved cash position, decent bottom-line business, strong operational progress, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Kin and Carta PLC at the current price of GBX 267.75 (as on 7 January 2022, at 9:10 AM GMT), with lower-double digit upside potential based on 48.77x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Creo Medical Group PLC

Creo Medical Group PLC (LON: CREO) is a FTSE AIM 100 index listed medical device entity focusing on the emerging field of surgical endoscopy.

Investment Highlights – SPECULATIVE BUY at GBX 147.50

• Acquisition of Aber Electronics Limited: On 12 November 2021, Creo Medical announced the acquisition of Aber Electronics Limited (manufacturer of power amplifiers and radio frequency products), which shall complement the Company’s three-tiered 'Build, Buy, Partner' strategy since CREO was already a customer of Aber.
• Growth Drivers: The Group expects positive trends to continue in H2 FY21 with increasing clinician education and training sites. Following the successful placing of additional £36.3 million, CREO has solid balance sheet to pursue strategic growth opportunities.
• Technical Indicator: From a technical standpoint, the MACD line has given a bullish crossover against the signal line, supporting a positive price potential.
• Valuation Multiples: In terms of valuation multiples on a trailing 12-month basis –EV/Sales, and Price/Book multiples are undervalued against the median of Health Care sector.

Key Risks

• Pandemic Led Disruption: The restrictions on elective surgery had raised the likelihood of the commercial execution risk. The increased financial pressure on governments and hospitals caused by the Covid-19 pandemic has exposed CREO to pricing and reimbursement risk.
• History of Operating Losses: The Company is not yet profitable and can face liquidity crunch in absence of substantial capital.

H1 FY21 Financial Highlights (for the six-month period ended 30 June 2021, as on 30 September 2021)

 (Source: Company Website)

• Strong Orders: The Group experienced solid orders for Speedboat Inject across the US and Europe.
• Operational Progress: During H1 FY21, it reported total sales of £12.9 million (H1 FY20: £0.0 million).
• Operating Loss: Its operation loss slightly worsened to £11.4 million in H1 FY21 from £10.6 million in H1 FY20, reflecting the impact of £0.6 million in share-based payments.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Sales Approach (FY21) (Illustrative)

Conclusion

CREO expects strong trends in H2 FY21 with increasing clinician education and training sites. Besides strong growth in the US and Europe, it has also enhanced direct presence in the APAC region. In a nutshell, the Group appeared optimistic for continued progress in FY22. Moreover, the acquisition of Aber will enhance the key element of supply chain and bolster the CROMA Advanced Energy Platform.

Notwithstanding, investors are recommended to punt on this stock post evaluation their risk-return profile since it is a speculative counter with small market capitalization. The stock made a 52-week high and low of GBX 236.00 and GBX 132.00, respectively.

Based on the strong revenue growth, positive trends, growth in clinical network, strengthened commercial infrastructure, and valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Creo Medical Group PLC at the current price of GBX 147.50 (as on 7 January 2022, at 8:00 AM GMT), with lower double-digit upside potential based on 11.61x Price/NTM Sales Per Share (approx.) on FY21E Sales (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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