CV Check Ltd (ASX:CV1) has been initiated by Shaw and Partners with a buy recommendation and price target of $0.21 per share (current share price: 16 cents).
Shaw notes that CV Check is on the journey of transitioning from less sticky transactional revenue towards repeatable, recurring platform and SaaS (software as a service) revenue.
With gross margins (GMs) of 59% in FY21 and ~64% in FYTD November, Shaw expects GMs to grow toward to 70% in the medium term.
The following is an extract from the initiation report:
Event
We initiate on CV Check (ASX: CV1) with a Buy Recommendation and Price Target of $0.21 per share (~45% upside).
Highlights
- Strong and growing platform – CV1 is a leader in the provision of workforce compliance management and reporting technology. Its cloud-based product suite is used internationally for dedicated pre-employment screening and daily workforce compliance management. Its direct model serves large business customers through a sales team coupled with a team dedicated to corporate customer relationship management and a model enabling self-serve business SME clients and individual consumers. Products and services across the group include: (1) Background screening / identity verification; (2) Onboarding and induction; (3) Deployment and re-deployment (i.e. logistics, booking flights and accommodation); and (4) Ongoing compliance monitoring and management. The business has a meaningful market share in its background screening segment and currently has >500 returning blue chip customers and >5k returning SME customers.
- Increasingly integrated and SaaS driven model – CV1 is on the journey of transitioning from less sticky transactional revenue towards repeatable, recurring platform and SaaS revenue. The majority of revenues are derived from police and other checks ($17.5m in FY21), with the acquisition of Bright People Technologies (Bright) in April 2021 adding ~$2.4m in SaaS revenues from Bright’s HR platform. We expect further growth in SaaS revenues and an increasingly integrated approach to servicing customers leading to growth in revenues to $27.0m (+55% YoY) in FY22e as a result of organic growth and acquisitive growth (we estimate ~30% organic growth).
- Product suite broadening with cross-sell potential – Previously with a majority focus in the background screening space, CV1’s recent acquisition of Bright adds new products focussed on managing the end-to-end employment lifecycle. CV1 has an opportunity to cross-sell Bright’s Cited workforce management modules to relevant enterprise and business customers, which we estimate to be a ~$5m incremental revenue opportunity based on 5% - 10% penetration and conservative assumptions.
- Robust unit economics, profitability emerging – With gross margins (GMs) of 59% in FY21 and ~64% in FYTD November, we expect GMs to grow toward to 70% in the medium term alongside expansion from the Bright acquisition plus incremental improvements in line with scale. On top of GM expansion, we expect CV1 to deliver operating leverage with EBITDA growing from $0.3m in FY21 EBITDA to $5.5m in FY24e, alongside EBITDA margins expanding from 1.7% to ~15.0% over the same period.
- Significant discounts to peers – CV1 trades at a significant ~70% discount to peers at 2.1x EV/sales (FY+1) versus peers on 7.7x. Furthermore, on EV/sales FY+1 adjusted for growth, which accounts for both trading multiples and growth akin to a more traditional PEG ratio, CV1 trades at an ~80% discount to peers given its greater leverage to growth combined with a reasonable sales multiple, albeit off a relatively lower base.
- Sector tailwinds with workforce compliance increasingly important – Businesses today are increasingly focussed on attracting, retaining and measuring talent. Human capital has been thrust into the spotlight by labour shortages exacerbated by Covid and the restriction on global movement, with forecasts for a 9.1% CAGR in spending on global human capital management software between 2019 and 2027. Given the broadening and complicated regulatory requirements across various industries, we expect CV1 to be a net beneficiary of a greater focus on screening, onboarding and workforce compliance.
- Risks – Technological change, competition, growth aspirations and capital requirements, M&A integration, churn, data breach and small cap illiquidity, among others.
Recommendation
CV1 is a leading platform provider across the workforce management sector with significant growth potential on the organic and acquisitive front. The stock remains undervalued relative to peers with a strong and growing platform. Initiate with Buy.