01-Sep-2020: Canaccord Genuity: Lowering Target Price: PainChek Ltd (PCK): Healthcare IT
- Analyst: Martyn Jacobs | Canaccord Genuity (Australia) Ltd | mjacobs@cgf.com | +61 3 8688 9164
- Rating: BUY (unchanged)
- Price Target: A$0.49 (down from A$0.55)
- Price: A$0.10
FY20 Result - COVID-19 slowing momentum but foundations are strengthening. Move PT to $0.49 from $0.55
Investment Recommendation
PainChek (PCK-ASX) reported a better-than-expected FY20 result, with total revenue of $2.8m (CGe $2.1m), Gross Profit at $2.6m (CGe $1.9m) and an Underlying EBITDA loss of -$3.5m (CGe -$4.1m). Although contracted beds have doubled to over 61k since 1H20, courtesy of the Government-funded program to seed the Australian market, and on-boarded beds nearly tripled in the same period to over 24k beds, momentum slowed in 4Q20 as a result of the COVID-19 related restrictions on the aged care sector. PCK showed that its pivot to digital operations during the pandemic is succeeding and it could grow through this challenging period with over 20% qoq growth in contracted beds. The extension of the Government program to June 2021 should ensure it meets its target of 100k Dementia beds and sets up positive commercial revenues as operators roll onto commercial contracts from January 2021. International expansion was interrupted, particularly in the UK, although there are signs this could pick up again by early CY21. We have subsequently reviewed our assumptions for the UK and RoW and reduced our expectations across FY21-FY22, with a FY21e EBITDA loss at - $1.2m (-$0.5m previously) and positive FY22e EBITDA of $2.7m ($4.1m previously). In conjunction with the dilution from the recent $10m capital raising, we have lowered our DCF valuation by c.11% to $0.49/ sh. We retain our BUY recommendation.
Key Points
User data recap - Contracted customers increased nearly 7x in FY20 to 207, with a nearly 5x increase in aged care facilities (RACs) to 722. Contracted facilities and beds increased c.23% qoq, while funded dementia beds increased c.21% qoq to c.37k. Activated beds increased c.6x to c.24k beds, leaving a backlog of c.35k beds that should be on-boarded in FY21. ARR also increased c.5x to $2.66m and by the end of FY21, ARR should reach c.$7m.
Commercial development activity continues, via the forthcoming Hammond Care Conference where PCK will present its product in conjunction with Pain Australia and inventor of the Abbey Pain Scale (gold standard in Aged Care), Jennifer Abbey, who is on PCK's Advisory Board. PCK is completing two pilot studies for the home care (HC) market, with outcomes scheduled for September. It is expected that commercial launch could happen in the December quarter. Recent marketing has led to significant inbound enquiry for the HC product. Assuming a successful launch, PCK hopes to launch in the UK c.6 months after the Australian launch. In the Australian market, there are c.129k Government-funded HC packages serviced by 925 operators. A successful market entry in FY21 could see a meaningful ramp-up in FY22. We do not begin to allow for the HC market in our estimates until FY23.
Regulatory development - PCK hopes to conclude regulatory clearance in the Canadian market by the end of CY20, with commercial launch to follow in 2H21. PCK should also soon find out from the FDA whether the process it is planning to undertake for its De Novo clearance is acceptable. This would be an important regulatory hurdle to clear, and may encourage investors.
Revised assumptions for the UK and RoW markets stem from the COVID-19 induced slowdown. As a result, we move our expected average beds in the UK from 30k to 5k for FY21 and from 10K to 1K for the RoW. In FY22, the UK moves to 35k from 55K and the RoW to 6.5k from 55k. We have also slightly reduced our Australian average bed assumptions in FY21 to 11k from 115k, but increased in FY22 to 180k from 145k, expecting there to be some catch-up post COVID-19.
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