Food for thought1.) The weak start to 1HFY24 is starting to...

Food for thought

1.) The weak start to 1HFY24 is starting to worry me that Alcidion may not reach positive operating cash flow and EBITDA for FY24. In terms of cost cutting exercises such as redundancies, you need to do it in phases over a longer period of time, unless things are really bad. Doing it consistently throughout the year would destroy morale etc. Hence, there is a natural limit to how much more staffing costs can be cut.

2.) Some of the issues (e.g. procurement delays) are largely outside Alcidion’s control – for example, procurement delays etc. However, Alcidion needs to seriously think about its employment strategies moving forward – for example, do they hire in anticipation of contracts bring awarded to them or after? Either way, this is serious problem because it led to the company incurring high employee costs with lower than expected revenue growth and cash inflow, and having to go cap in hand to shareholders to meet working capital requirements

3.) With a market capitalisation below $70M, Alcidion is currently bring priced at less than 2x revenue (contracted revenue for FY24 at end of Q2 is $35.5M and assuming no new sales and revenue recognition). In note 12 of the FY23 annual report, there is a table showing:

• the median across all healthcare SaaS companies in Australia is at least 4x (an implied share price of $0.11)
• the average revenue multiple for Australian listed healthcare software companies for example was 33.7x revenue

This may suggest that Alcidion is significantly undervalued at the current share price and/or the market has some significant concerns that trumps the perceived low revenue multiple valuation, including

• creditability of management/board
• uncertainties (particularly in the main UK market) persisting for longer and strength of balance sheet even after the small recent capital raise
• market strategies and execution etc
• guidance to deliver positive operating cash flow and EBITDA for FY24. The wording in the latest 4C has been toned down compared to the previous 4C

4.) Given all of the above, one can also try to assess Alcidion by excluding any any revenue growth, forward looking market opportunities etc. In other words, a boring plain vanilla SaaS healthcare company. That means assuming little or no growth, stripping out all unnecessary costs (particularly those non-core to ongoing operations and related to growth strategies). Yes – I am thinking of the value of Alcidion to a potential buyer who can strip out listing and compliance costs, board costs (possibly +600k annually) etc.

Realistically, I can see Alcidion delivering EBITDA of at least $3M in that scenario, noting that Alcidion still has $21.6M (as at FY23) of accumulated tax loss credits sitting on its balance sheet. This implies a 23x EBITDA multiple (noting the sticky and long term nature of contracts and assuming no growth). Naturally, the numbers would change significantly if Alcidion manages to win even one significant NHS contract.