Long-time ALC investor and reader. I’m in at $0.20 in 2019 so am...

Long-time ALC investor and reader. I’m in at $0.20 in 2019 so am a fair way down with lots of opportunity cost. I’m on the verge of selling out: here’s the pros and cons I’ve considered:

The bad (all pretty obvious points):

1. Last week looked totally panicked and disorganised. Cancelling the investor call the morning of, a surprise trading halt and CR from nowhere; finally, releasing the quarterly after 7pm on the last day of the Q = doesn’t inspire confidence.

2. In April, the company advised that no further capital would be needed. Within 6 months they break that promise. There’s a big amber flag! Management’s guidance should not be planned around. (You’ll note some of the subsequent comments nonetheless do this – a flaw in this analysis that I readily admit to.)

3. More generally, ALC needs to better communicate its successes. For example:

(i) In the Q1 call, KQ said that in Q4 FY23 Southampton NHS had expanded our contract; I cannot find this communicated anywhere beforehand.

(ii) We signed up a new NHS trust in Q1 via competitive tender - awesome work management! And yet what was the contract size? Length? Recurring vs non-recurring revenue? Terms of the tender – why did ALC suit so well? Are there options to expand and renew? You had a great win – boast about it!

(iii) The company made 29.9m in new sales last year – excellent especially given the stated NHS and NZL delays/restructures. And yet many here (based off their comments) mistakenly feel that wins have been few and far between. This objectively isn’t the case. It’s unfortunate this attitude has become pervasive. (I speculate that many miss the days – pre-mid 2022 – when every contract win or extension got an announcement. In turn, ALC now has an investor base still craving these sugar hits. Considering the numbers, I can see why the company has discontinued this practice (but I still fault their communication generally; at least elaborate on your wins in the Quarterlies). E.g. In March-April 2022 there was a run of 6 new announcements that amounted to 15.5m revenue over 5 years. However, assuming these payments aren’t lumpy (which they will be), these will amount to only about 0.7m additional cash receipts on the 4Cs. (These wins were good but they’re didn’t bringing the surge in new revenue that constant announcements might belie.)

4. Lumpy CFs make little difference to YOY returns (AR) and yet, clearly, they’ve become a risk for ALC in the shorter term. The proof: the board needs this CR to ensure there’s a ‘buffer’. This is particularly frustrating because lumpy CFs don’t reflect whether the business is going well or not (they just reflect what was received/spent in a 3 month snapshot). Indeed, the Q1 8.0m outflow was broadly in-line with KQ’s expectations whilst AR improved 1.7m (up 12% YOY). The 8.0m outflow is of no great moment; by projecting a CF positive year, management is telling us there’ll be (at the least) a corresponding 8.0m inflow later this FY. Also, Q1 FY22 saw spending at about 12.4m; this year Q1 spending was around 14.4m. This isn’t ideal but it also isn’t terrible considering the 32m in new AR we’ve won in that time (29.9m FY22 + 2.5m so far for FY23). In making my decision, I’ve set CF outflows and cost increases aside for now; I can draw no inference from these at present.

5. Share dilution is seldom a good thing. (However, in this instance it isn’t a particularly ruinous thing either. ALC has 1.2b shares on issue; adding an extra 0.067b is self-evidently at the lower end of ‘dilution’ (around 5%; i.e. my shares at 0.20 are now worth about 0.19c mathematically speaking).) The bigger problem is that ALC has substantially increased its shares on issue over several years. However, mathematically, last week’s SPP has hardly aggravated the situation. Again, I have set this consideration to one side.

6. Longer-term, the company has been close to breakeven/profitability for several years now. And despite big increases in revenue and cash receipts (e.g. receipts of 20.8m in FY20 vs 46.9m in FY23) it still has never quite made it. When will it? (Although, pleasingly, high gross margins, no more earn-out payments, operating CF and free CF suggest it’s getting close.) Given this info, I would sit on the sideline for now if I weren’t already invested. ALC at 7c could be a missed opportunity but my money could get quicker and safer returns elsewhere. Come back if/when ALC’s profitable. However, I’m already in, so do I cut my losses or do the facts say anything positive:

The neutral:

7. KQ’s repeated comments/’excuses’ about pipelines and delays are reasonable. Why?

(i) There is no direct evidence to the contrary. I.e. there is no evidence that there have NOT been delays. (That, by implication, would require that KQ has just been lying to us about it this whole time. The criticisms of her have tended toward the absurd.)

(ii) ‘Pipeline’ has been consistently and clearly defined by the company; it’s not a vague red herring thrown to appease the masses. Indeed we’ve been repeatedly reminded: we will not convert everything in the pipeline! Equally, the company has previously pointed out where it is converting the (much maligned) pipeline (e.g. see p.1 of the FY22 Q3 report).

(iii) The 29.9m in sales last FY, the Southampton contract, new NZL contract last year, ADF extension in Dec 2022, the (vague) brand new NHS contract in Q1, 4x Silverlink renewals = ALC is slowly kicking goals even with NHS delays. That wretched pipeline continues to bear fruit!

(iv) For frustrated investors like myself, I ask the question: what is this company that I’ve bought into? It’s a small-medium software provider mainly servicing government clients across 3 different geographies. What part of that made me expect a quick buck? (Clearly, I misjudged things in 2019.) Having KQ say "contracts are still moving more slowly than expected" is entirely plausible when ‘contracts’ mean replacing and implementing new software in government-run healthcare settings. I.e. this covers multiple hospitals and hundreds of beds; it brings changes to employees and patients, requires training, adapts software to individual ward’s environments, impacts systems’ interoperability (e.g. merging Patientrack with Cerner) and all this requires bureaucrats’ funding and sign-off. Consider: the ADF signed with ALC in 2021 yet their personnel won’t be trained to use ALC products till 2024! That’s how slow this space moves.

(v) Look at previous PAS and EMR contracts (in general but especially Silverlink): some were ‘in the pipeline’ plodding along for 7 years. That’s just the sector we’ve bought into with ALC; know what you’re buying. Those saying that, after 2 years, Silverlink’s purchase was a mistake – ironically, they’re being too hasty. (Also, it was a profitable company so also hard to paint as a negative. Indeed, the goodwill on the balance sheet has remained the same between the FY22 and FY23 reports (see p.70 and 71 respectively) i.e. Silverlink hasn’t become a less valuable business under ALC.)

The good:

8. Revenue/Costs are reaching a tipping point. Our costs last year were roughly 45-46m. We’ve already locked in about 35m for this FY. If we can generate an extra 10m or more in the remaining 3 Qs then profitability is possible (though still unlikely). Given our past performances this is not wild speculation (e.g. during last year, we generated 9.9m to be realised in that same FY); indeed, this was without any of the 60+ NHS opportunities coming to fruition.

9. Staff costs aren’t the disaster story some make them out to be. Using the Q1 quarterlies, and excluding 0.6m in bonuses, staff costs this year were 0.7m higher than last year. Think about those numbers: so they've hired maybe 5 to 7 new people and/or given a few others a raise? Hardly a blow-out or rorting especially when p.42 of the FY23 Annual Report lists failure to attract staff as a material risk. Also from the Annual Report figures, revenue rose 6.1m YOY whilst staff costs rose 6.5m (from FY22 to 23). The point is for all the new revenue we won last year (recurring and non-recurring), it roughly kept pace with increasing staff costs. See point 11 for more on this.

10. The company has stated they’re focused on profitability and leaving expansion for another day. (Expansion would further delay profit.) Obviously what I said at point 2 (above) makes me wary of trusting this company but the stated intention at least is welcomed. By inference, the board wants to create shareholder value long-term!

11. Recurring revenue (up 4.9m YOY) vs Non-Recurring (up 1.2m YOY): the gap continues to widen in our favour. As time goes on, the cumulative effect of our past wins recurring will be reflected in cash receipts. Lumpy CF makes this harder to observe but YOY it’s clearly there. There means there’s already a plan in action for revenue to overtake spending.

12. I accept the logic of the CR. It’s annoying but it makes sense: there’s been further delays to a massive UK government project which ALC fears might impact cash flows...is that such a wild story? I partly own this business so I can appreciate a board making a hard call to proactively diffuse a liquidity risk and sucking up the short-term heat. Would you prefer KQ preside over a 5m capital raise or a bankruptcy?

So, I’m going to hold. Having considered all the available information I am not satisfied, on balance, that the investment thesis has been broken.

Last week looked poor, brought a loss of value for shareholders, and has damaged the board’s credibility, but the business case remains unchanged.If I could have my time again I’d have invested elsewhere, yes (or sold in 2021). Plainly, this is unavailable to me. But tellingly there’s nothing in the numbers to excoriate the company’s performance. (FY22's 4m loss is the only rejoinder of substance. Hence I’d be on the sidelines if I had my time again.) Though the market (understandably) dislikes an unprofitable health/tech stock in the current macro-environment, ALC is closing in on being profitable. Further, they can clearly close sales in a tough environment, grow revenue, manage acquisitions whilst preventing expenditure blow-outs. (Staff costs steadily tick upward but I do not see this as an issue for growing a business; rather, an obvious requirement.) To sell now would be to sell at the bottom (I say that relatively: it’s the bottom for me having held since 2019; of course the SP could go anywhere although I note we are trading at a mere 2 or 3x revenue). Alternatively, if some of these NHS EMR contracts land (as the company has advised will) or there are new Miya wins, then things could turn around quickly. But I don't need to bet on this 'hope'; even if they don’t land, the company was able to make 29.9m in sales last year and was only 4m short of NPAT.

Again, for me at least, staying here is the most feasible path to getting my money back if I’m patient and happy to accept the opportunity cost.