Legacy Business Fuels Kinatico’s SaaS Ambition

This story features XERO LIMITED, and other companies. For more info SHARE ANALYSIS: XRO

The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

As Kinatico transitions to a new compliance SaaS solution, the legacy business provides funding for the new service development and a pool of potential customers.

-Small cap Kinatico is transforming to a SaaS-focused business
-Legacy business provides a ready-made customer pipeline
-Compliance solutions are non-discretionary and difficult to replace
-Taylor Collison highlights prospects for international expansion

By Mark Woodruff

As demonstrated by leading ASX-listed companies such as Xero ((XRO)), WiseTech Global ((WTC)), and TechnologyOne ((TNE)), the Software as a Service (SaaS) business model often presents a range of compelling advantages for customers, providers, and investors.

Chief among these is the recurring revenue model, which leverages monthly or annual subscriptions to deliver a predictable and stable income stream, enhancing revenue visibility and the ease of forecasting compared to traditional one-off software sales.

When combined with high scalability and attractive margins, such characteristics often support premium market valuations for SaaS businesses.

New research from Bell Potter highlights small-cap Kinatico ((KYP)) –market capitalisation below $100m– as one company in the midst of a strategic transformation towards a SaaS-focus, delivering real-time workforce compliance management via a suite of integrated, cloud-based solutions.

This strategic shift is expected to not only increase recurring revenue, but also improve margins, and potentially lead to a re-rating of the company’s valuation multiple, the research suggests.

Kinatico also has a long-standing screening and verification revenue stream, under the brand CVCheck. Here, revenue derives from one-time transactions, but equities research firm Research as a Service (RaaS) highlights CVCheck now represents a ready-made pipeline and sales acquisition client base for the new SaaS product.

CVCheck provides employment screening and verification services to over 10,000 repeat corporate customers including the likes of BHP Group ((BHP)), Inghams Group ((ING)), and IKEA.

With around 27,000 organisations as customers through its wider business, Taylor Collison concludes Kinatico is entering this next phase from a position of strength, not as a new entrant.

The new business aims to transform people management workflow with an app for customers which synchronises disparate workforce compliance, procedural, and ad-hoc data sources into a real-time administration dashboard.

The company has identified workforce compliance and procedural management are complex, time-consuming tasks, often leaving businesses grappling with scattered systems and incomplete data.

Shaw and Partners highlights the new Kinatico Compliance platform delivers substantial productivity gains (with some processes reportedly reduced to under 10 hours per week from around 35 hours), reinforcing the value proposition even in a weaker macroeconomic environment.

This broker points out compliance solutions are non-discretionary and difficult to replace, positioning Kinatico to sustain robust adoption.

Management’s research and industry feedback highlight strong demand across Health (Aged Care/Day Surgery), Industrials, Manufacturing and Financials, sectors burdened by fragmented compliance processes and rising regulatory pressure, explains Taylor Collison.

Shaw adds the HR compliance sector benefits from several structural tailwinds, including amendments to the Security of Critical Infrastructure (SOCI) Act and reforms arising from the Aged Care Royal Commission.

Taylor Collison points to international expansion as an additional source for further upside over the medium term.

Growing SaaS revenue

Kinatico’s SaaS revenue has continued a growth trajectory since it was launched in late FY21.

Just last week, the company provided a flash update on fourth quarter FY24 revenue noting total revenue increased by 15% in the quarter to $8.5m from the same period a year ago. This was a record for the group in terms of total quarterly revenue. 

SaaS revenue comprised 52% or $4.4m of the total, an increase of 57% on the same quarter a year ago and up 10% on the third quarter.

Bell Potter forecasts the SaaS business will grow to close to 66% by FY27.

The opportunity and competition settings 

The new SaaS offering provides Kinatico with a significant opportunity to expand into the small to medium enterprise (SME) segment.

According to Bell Potter, the market in which CVCheck currently operates has become highly competitive, with its core service increasingly commoditised. The introduction of a differentiated SaaS product allows Kinatico to pivot into a distinct and less saturated market.

Importantly, CVCheck’s existing base of corporate clients presents a valuable pipeline for converting users to the new platform, offering a strong starting point for commercial traction.

While several large global ERP providers dominate the enterprise space, the broker notes there are relatively few specialised or niche players actively targeting SMEs, a gap Kinatico is well positioned to fill.

The overall business is already profitable and cash flow positive, with around $10m in cash on the balance sheet and no debt.

A healthy financial position means the company has been able to internally fund development of its new SaaS solution. Bell Potter anticipates the company will be able to continue to do so.

Kinatico Compliance

The staggered rollout of Kinatico Compliance to large, cooperative clients is a prudent strategy, opines Taylor Collison, enabling management to address any issues ahead of broader commercialisation.

The platform has been shaped through two years of direct customer engagement and self-funded development.

The broker sees reduced go-to-market risk (given this is not a test of product market fit) but a controlled deployment of a platform already validated through close alignment with end users.

The tiered pricing model starts with a free entry point for organisations with fewer than five employees, followed by a base rate of $15 per user per month.

The suggestion made is unlimited admin access and the absence of lock-in contracts reduce onboarding friction and enhance retention potential.

Compared to peers such as Employment Hero ($29) and SafetyCulture ($24), Taylor Collison believes Kinatico offers a compelling and competitively priced alternative.

Management

Providing additional confidence, CEO Michael Ivanchenko has led Kinatico for nearly four years. Bell Potter highlights Ivanchenko has played a central role in developing and executing the new SaaS strategy.

The recent appointment of Chief Marketing Officer Chantal Walker further strengthens the leadership team, in the broker’s view, with her responsibilities focused on go-to-market execution for the ComplianceX platform and scaling digital sales channels.

Both individuals are considered critical to the success of the SaaS business; their departure would represent a material negative for the business.

Outlook

There are two daily monitored brokers in the FNArena database researching Kinatico now Bell Potter has started coverage with a Buy rating and 12-month target price of 30c.

Buy-rated Shaw and Partners has a 27c target.

Outside of daily coverage, Taylor Collison has an Outperform rating and 27c target.

Research as a Service has a discounted cash flow (DCF) valuation of 38c, expecting the gap between the current share price and its valuation to close.

RaaS’ valuation is contingent on continued SaaS revenue growth and the delivery of sustained positive free cash flow and operating profit.

In a market that is largely coloured red on Wednesday, Kinatico shares are changing hands -2c weaker at 22c. Still, this is significantly higher than the 14c at the start of the calendar year.

The author owns shares in Kinatico.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms