Broker report, page-17

Having had the opportunity to review the broker report and reflect on things, the more I am convinced what a great acquisition MKM Health has proved to be, albeit it was more like a ‘reverse takeover’ in reality.

A question from me - Does anyone know why Veritas has forecast for a 10% increase in the average number of shares in FY20E?

Personally, the key highlights of the Veritas report were:

Alcidion’s high operatingleverage

Veritas’s analysis has reinforced Alcidion’s high operating leverage. With a high gross margins and a relatively high fixed cost structure (low variable cost and low forward capital expenditure requirements for new contracts), a small uplift in sales (revenues) can magnified into large cash flows. It is estimated that a 11% lift in revenue translate to a 242% growth in EBIT.

Things are looking positive due to the sticky nature of Alcidion’s customer base and recent track record of winning new contracts, with another 25 immediate opportunities to upsell Alcidion’s combined offering.

Needless to say, there is a downside to having a high operating leverage business. A loss in sales can also magnified into a larger decline in EBIT.

Transformationalrevenue mix profile

We all know that the recent MKM Health acquisition provides a recurring revenue mix will enable Alcidion to grow into a sustainable profitable growth story from FY19E.

However, what was identified in the report and something I did not know previously are the gross margins associated with the recurring and non-recurring business operations.

Veritas has forecast an 80% gross margin associated with recurring revenues and a much lower 35% gross margin for non-recurring revenues.

Diverse and offshore earnings exposure profile

In recent periods, the market has allocated a premium for businesses with diverse earnings and offshore exposure (e.g. Clydesdale Bank). Perhaps once Alcidion has achieved few more consecutive quarters of positive operating cash flows, the market will recognise that just under half of Alcidion’s revenues arederived from United Kingdom,  investors who want that offshore earnings exposure will allocate a market premium for thataccordingly.

With the newly launched NHS long-term plan and Alcidion’s expansion plans for the region, we should hopefully expect to see a growing proportion of offshore earnings.