Ugly Ducking About to Turn Swan?

This company reminds me of another company in which I a shareholder (ABV) -  not in terms of their respective business models because they are quite different animals (ABV is a manufacturer and distributor of physical widgets while KYP is a service provider) - but in terms of market perception of where they are in their respective evolutionary timelines.  

Specifically, it occurs to me that KYP is today where ABV was 12 months ago, i.e., passing the inflection point after which the Revenue-Cost jaws open up sharply, but still largely unknown and undiscovered by the market.

In KYP's case, after the 2021 acquisition for $15m of Bright People Technologies, the rapid growth in the SaaS Revenues was occurring off too low a base to be able to offset the dropping away of the Revenue of the Criminal and CV checking businesses (i.e., a top-line headwind as a result of the Law of Large Numbers, whereby the largest proportion of the Revenue total was stalling/going backwards which negates the effect of the fast-growing, small Revenue segment).

But, arithmetically, that situation cannot exist indefinitely: at some point the fast-growing Part becomes proportionally large enough to start impacting the growth rate of the Whole, as can be seen in the chart below.  The two grey shaded regions represent the KYPs non-SaaS business lines, while the blue part is the SaaS business:



As can be seen, in the past four half-years, the growth rate of KYP's total Revenue (represented by the dark blue line on the graph, and read off the right-hand axis), has been falling, albeit still positive due to the strong increase in SaaS Revenue just able to offset the falls in non-SaaS Revenue.

However, whereas SaaS Revenue made up less than 10% of Total Revenue two years ago, in JH23 it was more than one-third, and in 12 months' time SaaS is expected to represent close to 50%.   

This means that, increasingly, the fastest-growing Part will become the overarching determinant on the growth rate of the Whole and so my contention is that this business has just passed a critical threshold after which KYP's top line growth will turn around a start growing at an accelerating rate.  

Based on my non-aggressive expectations of:

1.)  SaaS Revenue growth of slowing from close to 100% over the past two years, to 45% in FY2025 and 35% in FY2026, and
2.)  10% contraction in non-SaaS Revenue in each of FY2025 and FY2026

that would result in 8% and 10% increases, respectively, in Total Revenue in FY2025 and FY2026 to $31m (FY2025) and $35m (FY2026).

So, even if there is a meaningful investment in the current ~$25m cost base (which has been held at that level for the past 3 years), there is certain to be a significant increases in the operating profit lines, with EBITDA likely to come in somewhere around $4.5m-$5.0m this year and $5.5m-$6.0m in FY2026.

Based on the current ~$36m EV, it puts the stock on  around 7.5x EV/EBITDA based on a FY2025 prospective basis, and 6.3x on FY2026 numbers.  

If the company reports the sorts of financial outcomes envisaged in this note, and is still seen to have more of the same coming, it will most certainly be afforded meaningfully higher valuation multiples by the market.

At what I think would be a fair and reasonable EV/EBITDA of 10x implies a share price of 16.5c, so 50% upside on a 2-year view.

Possibly not an eye-popping return potential for a microcap stock, but sufficiently attractive to make it worthy of owning today.

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