The share price has taken yet another whack after the release of their FY report. Strangely enough, if you provided me the below figures last year and asked if I would be happy to see these at the conclusion of FY24, my answer would have been yes.
- Net income of 5.4m for the year, a 57% increase on last year’s 3.6m (all figures US unless I state AUD)
- Free cash flow of 3.3m, well up on last year, which was negative.
- EPS of 3.15c, an increase on last year’s 2.02c.
- 30.1m cash in hand, up on last year’s 28.6m, with almost 10m in trade and other receivables. In short, total assets have grown from 38m to 43m.
Importantly, we saw some improvement on a not-so-strong H1. Clinical trials revenue increased to 21.5m (vs 17.9m in H1), but healthcare contribution wasn’t as strong with a 700k difference. Operating expenses were essentially flat, and with that EBIT increased from 1.8m to 4.7m, with net profit more than doubling.
Okay, what's the problem?
- Contracted future revenue decreased…AGAIN. This now stands at 101m, although was previously 132m same time last year.
- Across the year, revenue grew from 40.5m (FY23) to 43.4m -- single digit growth. The risk is this company turns into a ‘gunna’ company – we are almost there or we are well-positioned to capitalise on…
Looking forward, FY25 future revenue sits between 28-29m. At a guess, Cogstate will add another 25-30% on top of this (based on previous years). To speculate, this could put next year's revenue at around 37-38m without any significant wins, which will see them move backwards on an already disappointing FY24.
At a current market cap of 177m, they are profitable with a revenue multiple of just under 3x and a P/E of under 35. They also have 30m burning a hole in their pocket. There is an argument that the current price is quite attractive using traditional metrics. But despite expectations tapering, Cogstate is still priced to grow. I had a play with my DCF. Let’s say FCF was to grow 1m per year for the next few years – I reach a company value of just under 90m (US) and a share price of under 80c (AUD). If we change this to 4m FCF next year, increasing by 2m a year thereafter – I arrive at a more modest company value of 120m (US) and a share price of 1.05c (AUD), basically where the share price stands today.
The thesis here is a classic picks and shovels play relevant to the growing Alzheimer's market. That remains firmly intact, even if it has taken some bruising the last 12-24 months. That said, it was easier to justify Cogstate’s valuation when their growth was >40%. Ultimately, we need to see reasonable growth to make the current valuation appear fairly priced, let alone attractive. The million-dollar question relates to what sort of growth Cogstate will see over the next few years.
Future growth is largely dependent on securing early stage (phases 1 and 2) trials from large pharma and then staying the journey through the stages of development. The good news is there were multiple phase 2 trials (with new customers) executed during FY24, in addition to the recent execution of a main contract for a phase 3 trial. Despite my attempts to be positive, my conviction has certainly taken a hit over the last 18 months and I plan to do some hard thinking over the next few weeks. Does anyone agree, disagree? Curious as to the thoughts of others.
