From UTRWhat’s New?In the March and June quarterly reports, M7T...

From UTR

What’s New?
In the March and June quarterly reports, M7T reported sales orders of $7.4m and $4.4m respectively, for FY24 total revenue of $61.3m, in keeping with the guidance of over $60m. The shares have been weak but as we show, the key is to look through recent quarter sales numbers. Moreover, the signs are there, with a 3-year subscription renewal with DocPanel worth $2m, a significant increase on the former contract.

Bull Points
· Subscription business model
· Strong growth rate

Bear Points
· Costs growing at the same rate as income
· Contract sales volatile quarter to quarter

Analysis: Quarterly sales orders are volatile and the most recent two quarters have underwhelmed. A better metric is the trailing twelve-month sales number which continues to grow strongly. For the past four years sales orders have doubled from $27.5m in FY21 to $61.3m in FY24; an annual growth rate of over 30%.

Sales can be for contracts delivered over a number of years, hence take a couple of years to be reflected as cash received. In FY24 the company recorded cash receipts of $35m, somewhat analogous to the sales order number for FY22. The strong orders recorded over the past two years bode well for cash receipts.

Costs, mostly staff, continue to grow although operating cash flow has been positive for five years, hence growth has been self-funding. Cash sits at $26m and there is no debt.

The value of a company is the present value of its future cash flows, which M7T is locking in, albeit with some re-investment for growth. For FY24, operating cash flow was $3.1m and free cash flow was $2.8m. The enterprise value (market cap less net debt) of $117m is underpinned by cash generation and cost control.

The opportunity for growth remains very large with a fragmented market and a wide array of potential customers; a strong sales pipeline in many regions, but this needs to translate to increasing cash flow.

Portfolio Risk Rating: The transition from upfront sales to a subscription model takes time but is occurring. M7T is still a small business with annual cash receipts of $35m but there are sales contracts for growth.

RADAR RATING: Growing in maturity with a subscription model and potential to for higher cash flows. Doesn’t require funding and has a large cash balance.