Checkit announces major blue-chip contract wins

Cambridge-based technology group Checkit (CKT:24p) has announced major blue-chip contract wins alongside a first-half trading update that revealed 24 per cent growth in ARR to £12.6mn.

The technology group provides customers with a workflow management software platform that delivers data-driven remote monitoring and automated systems surveillance to manage their teams of deskless workers. Digitising the scheduling and reporting of workflows can enhance staff efficiency and retention rates, operational insight and compliance.

Checkit already provides 330 Waitrose and 60 John Lewis stores with connected workflow, automated asset monitoring and digital building management solutions. However, the new contract, which started on 1 August 2023, has been renewed for a further three years with improved pricing, highlighting the high customer retention rate and improving visibility of Checkit’s revenue. John Lewis accounts for a sixth of the group’s ARR of £12.5mn.

Moreover, having signed a master service agreement with FTSE 100 food and support services group Compass (CPG) in April this year, Checkit has since entered into three new contracts for its connected workflow, automated asset monitoring solutions, primarily in the food services sector.

The trading update also revealed that over half of the growth in ARR resulted from upselling and cross-selling services within the existing customer base, demonstrating how the software platform enables clients to improve productivity and make efficiency savings. The balance of the growth came from new customer wins and pricing, hence the 113 per cent net customer retention rate. It’s worth flagging up an eye-catching performance in the US, which delivered 41 per cent higher ARR of £3.2mn, accounting for a quarter of the total run rate. Prospects of a soft economic landing augur well for improved trading prospects in that country, too.

Accelerated move to profitability

Increasing ARR is key to the business turning cash profitable, which the directors expect in the financial year to 31 January 2026. However, they are also accelerating the path to profitability, so it could happen before then if the strong sales momentum is maintained. Importantly, net cash of £12.5mn is more than double the combined forecast annual cash loss of £3.7mn (2023-24) and £2.3mn (2024-25) for the next two financial years, so the balance sheet is well funded for the business to hit that inflexion point.

Faster movement to break-even is also the key to driving a major re-rating. That’s because the group’s £13.2mn enterprise valuation equates to one times Edison Research’s current-year revenue estimate of £12.5mn, a deep discount to the average multiples for software-as-a-service (SaaS) sector peers in the UK (2.4 times) and the US (6.7 times). Expect a narrowing of the ratings’ discount with software sector peers if Checkit’s management can maintain the progress, as seems highly likely.

So, having selected the shares, at 26p, as one of my 2023 Bargain Shares, I believe they are worth buying at the current offer price of 25p ahead of the interim results on 14 September 2023. Buy.