Hunting for Value: The Alcidion (ASX: ALC) Story

Good morning, Armchair Army,

Welcome to today's edition of The Armchair Analyst, a 5-minute daily update on the ASX life-sciences sector.

While I am an Armchair Analyst…

I still do some “real” analyst work from time to time.

(In spite of myself).

So today I want to do something different.

Some real analyst work.

Today, I want to show how I might assess a business’s financial health to evaluate whether a company is OVER or UNDER valued.

The guinea pig?

Alcidion (ASX: ALC).

The next company on my Biotech 165 Challenge.

Alcidion sells workflow management software to big hospital networks.

The company did $51.6 million in revenue last year, was profitable, had $20 million in the bank, and gross margins above 80%.

At 10 cents, the company trades at an enterprise value of around $120 million.

Just above 2.3x revenue.

So…

Is this overvalued, or undervalued?

Cheap or expensive?

Let’s find out.

But first…

Enlitic (ASX: ENL) signs a US$806K contract with the University of Michigan Health to migrate 10.6 million radiology and cardiology images. (ENL)

🪑 Starting to get some traction.

AFT Pharmaceuticals (ASX: AFP) licenses Maxigesic to Japanese pharmaceutical company Mikasa Seiyaku for the region. (AFP)

🪑 Nice deal.

Paradigm Biopharmaceuticals (ASX: PAR) extends voluntary suspension pending review of Phase 3 trial data. (PAR)

🪑 The company's debt makes this one a bit more complicated.

The FDA completes its inspection of EBR Systems (ASX: EBR) new manufacturing facility. (EBR)

🪑 Some small “observations” from the FDA, but the facility should be on track for launch next quarter.

Healius Limited (ASX: HLS) sells off Agilex Biolabs to Novotech for $160 million. (HLS)

🪑 Nice deal.

Nexsen Limited (ASX: NXN) announces a proposed 50:50 joint venture with FlashDx for a CE-marked GBS diagnostic device. (NXN)

🪑 This was a headscratcher.

In the same week that the company paused its GBS study for StrepSure, it licensed a second rapid test device (this one using PCR) for the exact same condition.

While the company says that the new product will “sit alongside… StrepSure”, it’s hard not to look at the two announcements together and see the company moving away from StrepSure.

Still, the company says an FDA submission is still on track for Q1 next calendar year. 

I’m just not sure which device they’re talking about…

Memphasys (ASX: MEM) identifies a potential expedited FDA 510(k) clearance pathway for its sperm separation system to enter the US market. (MEM)

🪑 Essentially, the company has identified a “predicate device” it may be able to use for the 510(k) pathway to approval in the US.

Initially, the company’s US regulatory strategy was to go down the De Novo pathway. This would require additional studies.

Next, the company will hold pre-submission engagements with the FDA to see whether the FDA agrees that the predicate device MEM has identified is sufficient to pursue the expedited path.

Report: How J&J paved the way for Compass’ coming psychedelic drug launch. (Biopharma Dive)

🪑 Great read. Interview with Compass Pathway’s CEO on their plans to roll out their psychedelic drug through established ketamine clinics in the US.

Correction to my article last Thursday.

I missed a decimal place when recounting Micro-X's share price movement. It should have been “1.5 cents to 5.4 cents”, not “15 cents to 54 cents”. The article has been updated.

TALi Digital (ASX: TD1) closes an oversubscribed Share Purchase Plan, raising $0.5M. (TD1)

🪑 It’s always good when there are $2 million in bids for a placement and only $500K to go around. 

Seven dementia startups have shared $15.6 million in the latest round of government-backed dementia research grants. (Startup Daily)

EMVision (ASX: EMV) received a $4.3M R&D Tax Incentive refund. (EMV)

I first met the Alcidion (ASX: ALC) CEO in May at the Digital Healthcare Conference trade show.

The booth was busy, but I managed to get a demo of the product.

It’s important…

Because the first question to ask yourself as an analyst.

What does the company do?

Let me frame the problem…

Have you ever been to a hospital emergency room?

… especially after hours.

It's a nightmare.

People holding a broken arm, coughing, a toddler crying somewhere, and a nurse behind the desk doing their best to sort it all out.

This is a problem.

Hospitals can be incredibly inefficient with patient workflows… especially in the Emergency Room.

The current "standard of care" to check someone in:

Call the ward → Nurse walks down to the room → Checks if bed is free → Calls back the emergency department.

"No free beds here".

Try again…

Call a different ward → Nurse walks down to the room → Checks if bed is free → Calls the emergency department.

This process repeats multiple times until a bed is found.

Incredibly inefficient.

This was the impetus for Alcidion's product.

A centralised system to manage patient workflows in emergency departments.

There's a pretty decent video that explains what Alcidion does.

Sorry about the annoying royalty-free music.

Patient flow was the first solution.

But Alcidion also offers virtual care, electronic patient records, clinical workflow solutions, and more.

It’s a lot of buzzwords…

BUT at its core, the platform is designed to be the digital backbone of any hospital system.

It does this by pulling together all of the hospital's data and putting it in one place.

FIRST FEATURE: the bed tracker.

It shows where patients are, who is deteriorating, who is ready to go home, and which bed is about to free up.

Every patient who goes home a few hours earlier frees up a bed for someone in the emergency department.

More free beds = more cash for the hospital.

SECOND FEATURE: the patient tracker.

Observations, test results, referrals, handover notes and discharge plans, all on one electronic "journey board".

It follows each patient from arrival to discharge.

(Royal Darwin Hospital put theirs on iPads so every staff member could see it.)

Every year, over the past few years, the company has signed one big deal:

Big contracts. Big hospitals. Sticky customers.

The catch?

Selling into a hospital system is HARD.

Longggg sales cycles…

VAC committees, IT, board decisions, multiple stakeholders.

While Alcidion is competing against “phone calls and walking”… it still has to get past the biggest blocker to any deal.

Inertia.

But inertia cuts both ways.

While it’s hard to get in…

It’s also equally as hard to get out.

Which makes customers incredibly sticky and revenues reliable.

So… 

Let’s take a look at Alcidion's financials to set a baseline for “valuation”.

(Because this stock makes money)

The second question to ask yourself as an analyst.

What is the company’s financial performance?

And there are some good free websites that give you a lot of this information…

(so you don't have to dig through all the old annual reports yourself)

Today, I'm using Stock Analysis.

Here is the company's revenue & profits for the last five financial years:

Three things I notice:

Next, the cash balance.

The company had $20.64 million in cash, a balance which has grown steadily over the last two financial years.

The company also has no debt.

I also like to look at the income statements to get a sense of the shape of expenses.

In the last financial year, gross margin declined (1). 

This was due to a sharp increase in direct costs (mostly third-party software Alcidion resells as part of its big contracts, according to the annual report).

BUT operating margin improved (2), indicating stronger overall business health.

Finally, I like to look at the shape of the revenues.

Importantly, for a software product, I’m looking for annual recurring revenue, $31.9M.

This is subscription revenue that, for a business like Alcidion’s with sticky customers and low churn, is very likely to exist the following year.

So, in summary, Alcidion has:

Cool… now what?

Now it’s time to try to put a “value” on this.

The third question an analyst should ask.

How do we value this?

A business is worth the future cash it can generate, adjusted for risk.

Everything else is basically a shortcut for estimating that.

But you have to do the work and make certain “assumptions” about the company's future.

Here are the common valuation techniques:

A revenue multiple compares a company’s value to its annual revenue, showing how much investors are willing to pay for each dollar of sales.

This is good for valuing businesses that are growing quickly but aren't making much profit yet.

Especially software.

Where gross margins are high, and each extra sale should eventually drop through to profit.

Right now, Alcidion trades at a 2.3x revenue multiple.

Which means that investors are “willing to pay” $2.30 for every $1 of revenue today.

Companies that show faster, more durable revenue growth get valued at a higher multiple. 

This is because investors are paying for the future earnings that today’s revenue can grow into. 

Not just the revenue itself.

If a company can keep growing revenue quickly for years, then today’s $1 of revenue could become $2 or $3 later, so investors are usually willing to pay more for it now.

Especially for high-gross-margin software businesses.

Changing the revenue multiple will also change the company’s value.

Let me demonstrate (changing from a 2.3x revenue multiple to 5x):

Applying a 5x revenue multiple gives a target price of $0.20.

Evaluating what revenue multiplier is “reasonable” requires a bit more work… looking at other companies in the sector and making a judgment call on how fast and durable the revenue growth is.

Given Alcidion’s incredibly low churn (they sell to hospitals, after all).

This revenue multiplier is all about speed.

Speed to contracts.

Speed to deals.

The faster Alcidion grows, the bigger the revenue multiplier the market puts on the stock.

Take the company’s value and divide it by its earnings. That tells you the earnings multiple investors are currently paying.

For Alcidion:

Enterprise value ~$120m ÷ EBITDA $6.8m = ~17.6x EBITDA

So investors are currently paying about $17.60 for every $1 of EBITDA.

Then you can compare that 17.6x to what similar healthcare tech businesses trade or sell for.

It’s particularly useful for valuing mature, profitable businesses with stable, predictable earnings.

(not really growth businesses like Alcidion)

Generally, businesses with faster growth, more predictable earnings, and better margins trade at higher earnings multiples.

A Discounted Cash Flow (DCF) values a business by forecasting the cash it will generate in the future, then discounting those future dollars back to what they are worth today.

It’s especially useful for businesses with predictable long-term cash flows.

(It’s also how analysts earn their keep!)

Generally, analysts create a model with certain assumptions that predicts the business's future cash flow.

THEN, it adds a discount rate and gives the company a “value” by discounting future cash flows back to net present value.

THEN, it will divide that “value” by the company’s current shares on issue to provide a “price target”.

(They don’t just pull them out of thin air, you know!)

The Stock Analysis website I was using earlier takes a “consensus” forecast for Alcidion in FY27, FY28 and FY29.

Despite growing 26% last financial year, the “analysts” have forecast less than 10% growth over the next three years.

(with one analyst only forecasting 1.9% growth next year).

This gives you strong insight into market expectations.

Essentially, the analyst consensus suggests this year may be a tough growth year for Alcidion.

Each analyst still has a price target, though, between 13 cents and 17 cents, driven by the cash flow model based on the revenue growth outlook.

SO…

If you think Alcidion can BEAT these revenue growth targets, there may be some value uplift at reporting season.

(Not always, but most of the time).

Earnings & revenue multiples don’t tell you whether Alcidion is cheap or expensive

You need something to compare it to.

The fourth and final question to ask yourself as an analyst.

What multiples do similar stocks trade at, and is this reasonable?

I’ve put together a list of similar companies and where each trades.

While these are never always “apples-to-apples” comparisons…

They do help to guide and frame where a company sits in the eyes of the market.

Companies with stronger margins, faster growth rates and more reliable revenues will get better multiples.

(That’s why Pro Medicus has an eye-watering 63x EV/Revenue multiple)

So YOU need to judge what a “fair” multiple is for a company…

There is a famous saying.

In the short run, the market is a voting machine. But in the long run, it's a weighing machine.

As investors, the goal is to…

FIRST, work out what the business is actually worth…

THEN compare it to the “price” the market is giving you…

IF the current price is well below your target price for the company…

THEN it is undervalued.

That gap is your opportunity.

But all the value in the world doesn't matter if the company can't execute.

For Alcidion, it's all about one thing.

Closing contracts.

So, is Alcidion undervalued?

It all depends on whether it can BEAT the market’s growth expectations.

But really, who knows…

I’m just the Armchair Analyst. 

A big thank you to Alcidion CEO Kate Quirke and Chair Beck Wilson for sharing the Alcidion story with me.

See you all tomorrow.

The Armchair Analyst