US Market Expansion And Cost Savings Will Secure Robust Performance

Key Takeaways

• Checkit's U.S. market expansion and focus on high-margin industries indicate potential for significant revenue growth and sustained profitability.
  
• Operational efficiency and cost reduction efforts suggest improved margins and an accelerated path to profitability, bolstering a stable revenue base.
  
• Continued high churn and reliance on cost savings highlight risks to revenue and profitability, compounded by market uncertainties and potential challenges in new customer acquisition.

Catalysts

Provides intelligent operations management platforms for deskless workforces in the United Kingdom and the Americas.

• Checkit's expansion in the U.S. market, with ambitions for it to contribute over 50% of sales and revenues, indicates potential for significant revenue growth in a large, less volatile market.
  
• The company's ability to increase gross margins from 54% to 70% over three years showcases operational efficiency, suggesting that future net margins could also see improvement due to cost control measures and economies of scale.
  
• Strong net revenue retention of 107% alongside a strategy of landing large clients and expanding within those accounts (as seen with customers like BP and Dishoom) suggests a stable and growing revenue base, which is crucial for future earnings.
  
• Checkit's focus on high-margin, heavily regulated industries such as healthcare (50% of ARR) and food retail (35% of ARR) positions it well for sustained revenue growth and profitability due to demand for compliance and efficiency in these sectors.
  
• The company's commitment to an accelerated path to profitability through a £3 million cost reduction program indicates an improvement in LBITDA, reducing losses, and potentially achieving profitability sooner than expected.

Checkit Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Checkit's revenue will grow by 10.3% annually over the next 3 years.
• Analysts are not forecasting that Checkit will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Checkit's profit margin will increase from -25.5% to the average GB Electrical industry of 5.0% in 3 years.
• If Checkit's profit margin were to converge on the industry average, you could expect earnings to reach £941.5 thousand (and earnings per share of £0.01) by about April 2028, up from £-3.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.9x on those 2028 earnings, up from -4.0x today. This future PE is greater than the current PE for the GB Electrical industry at 14.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Checkit Future Earnings Per Share Growth

Risks

• There is an expectation of continued exceptional churn, with a total churn and contraction of £1 million in ARR for FY '25, which might continue to impact net revenue negatively and could be a future risk to earnings.
  
• The financial modeling is conservative due to uncertainty in market conditions, with no large new contracts assumed, pointing to potential challenges in revenue growth forecasts.
  
• The company acknowledges that its transition to profitability relies significantly on the £3 million annual cost-saving measures, suggesting potential vulnerabilities in net margins if cost controls are not maintained.
  
• Fluctuations in the U.S. market due to macroeconomic factors or regulatory changes can influence growth initiatives, potentially impacting revenue expansion in a significant target market.
  
• With 94% of revenue being recurring and under long-term contracts, while this offers stability, it also highlights potential restricted flexibility in immediate earnings growth if new customer acquisition fails to meet expectations.

Valuation

• The analysts have a consensus price target of £0.22 for Checkit based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £18.9 million, earnings will come to £941.5 thousand, and it would be trading on a PE ratio of 31.9x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of £0.13, the analyst price target of £0.22 is 39.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.