The microcap poised for success in the regtech space

Great Expectations

Kinatico (ASX: KYP) was founded in 2004 and listed on the ASX in 2015 as CV Check. As the Company’s former name suggests, its core business is providing employee identity checks, for which it is a market leader in Australia with over 10,000 customers.

Post-listing, KYP’s market cap quickly surged past $130m even though it had little revenue to speak of at the time – just $2.6m in FY15.

That initial rush of investor enthusiasm waned as KYP burned through considerable cash and failed to meet expectations for scaling the business.

The eventual emergence in 2023 of KYP as a cash generative and profitable business has no doubt tested the patience of those shareholders who have been there for the full journey; however, a lot of work has gone into setting it up as a much stronger company.

Recent performance

The story for today is that KYP has achieved $0.75m underlying net profit in FY23, including a $1.5m net profit in the second half. Profitable, and increasingly reliable, with annualised software-as-a-service (SaaS) revenue surging 212% in FY23 to $7.8m from $2.5m a year earlier.

This is part of the strategy of CEO Michael Ivanchenko, appointed in August 2021. Over the last two years, Michael has repositioned the company into a profitable venture, replacing the commoditised and transactional criminal checks with recurring SaaS revenue from enterprise customers. This, along with increased automation, has helped drive an increased GP margin.

Kinatico’s solution for enterprises

Cited is KYP’s SaaS-based platform for end-to-end workforce compliance and management. This solves the ongoing people verification needs for large enterprises. The software is particularly helpful in removing the need for enterprises to retain high security identification data. The main competition is Microsoft Excel.

KYP has found traction in the healthcare sector, where organisations have numerous employees and contractors and need to ensure their staff have updated credentials. One of KYP’s largest customers is Aruma, which has 6,000 employees providing disability services. They have a frequent need for screening employees and ensuring they have the right working checks.

Where to from here?

Kinatico’s growth prospects are underpinned by the following factors:

• The increasing demand for workforce compliance solutions, as businesses strive to comply with a growing number of regulations
• The shift towards SaaS-based solutions, which offer a more cost-effective and scalable way to deliver compliance services
• Strong customer relationships and a track record of innovation

In a world where the volume of “red tape” and compliance only ever seems to be increasing, KYP is using technology to streamline regulatory processes.

There is also the opportunity to amplify the business with the adoption of more advanced technologies: there is an ambition to hold digital authentication keys for documents and government-certified biometric identity verification; and the potential to develop AI identity verification solutions, providing enhanced security against sophisticated identity theft.

These would all help customers while improving KYP’s gross profit margins through increased automation.

Conclusion

For those approaching KYP without baggage, its market cap is now a fraction of that peak eight years ago at $40m. What you get now for that price is:

• Approximately $9.6m net cash on the balance sheet at 30 June 2023
• Positive free cash flow despite significant investments into the Company’s tech stack and business development
• A valuation well below peers with an EV/revenue of 1.1x and EV/EBITDA of 6x, both based on the current second half FY23 annualised run-rate

KYP is a rare breed of ASX-listed technology company: free cashflow positive and expanding into a large market. The company has had great early success in converting customers to its SaaS offering. There is a significant pathway for future growth as it helps businesses solve the ever-increasingly complex world of identity regulation. Finally, it is in the enviable position of having significant fire power with which to implement its strategy, with 25% of its market cap backed by net cash.