SenSen Networks Ltd (ASX:SNS, OTCQB:SNNSF) is in the position to narrow the valuation gap against its peers if it can sustain the growth seen in annual recurring revenues (ARR) and improve its liquidity position, Edison Investment Research Ltd said.
The research firm said its view was underpinned by SenSen’s robust cash receipts of $2.6 million for the first quarter, up 39% year-over-year, and ARR of $7.6 million as a result of multiple contract wins across the globe during the quarter.
Additionally, SenSen’s management expects to approach an ARR of about $10 million by the end of the 2023 financial year and will be implementing $1.1 million in annual savings starting in the current quarter to improve cash flows.
Following are excerpts from Edison’s research report:
SenSen’s shares, down 54% year-to-date, trade at a 1.9x FY24e price/revenue multiple, a discount to its peers despite the company’s higher expected growth rates, though some of the gap could be due to the company’s liquidity situation.
Using the peer average price/sales multiple of 3.9x suggests a share price of A$0.14, a potential upside of 102%. If SenSen can continue its momentum in wins across the globe and improve cash flows and liquidity (as the current level is only about six months at the Q123 cash burn rate), we expect the gap could narrow.
International and domestic contract wins
SenSen made progress in its expansion plans both internationally and domestically as it continued its transition to a ‘pragmatic SaaS’ model.
The North American wins included Vancouver and Abbotsford, BC, multiple hospital chains and school districts across the United States and a rollout in the Las Vegas Airport. Asian wins included expansion in Solaire Casino in the Philippines and two projects in the Port of Singapore.
Domestically, SenSen has projects underway with multiple Australian city councils and continued its roll-out across the retail fuel market, with about 430 locations using SenSen’s solutions.
Cash conservation and reaching cash flow positivity by FY24
SenSen ended the quarter with a cash balance of $3.2 million, down from Q422’s $6.2 million, and unused finance facilities of $1.8 million. We estimate that SenSen has about $0.8 million in net cash (including leases) as of September 30.
Recognising the importance of conserving cash in the current inflationary environment (above 7% in Australia), management continued focusing its attention on cost control and reaching positive cash flow.
The company streamlined its operations under a single platform strategy and focused its efforts on those with a direct short- to medium-term revenue opportunity, putting long-term projects on hold.
SenSen also removed redundant staffing positions, which should deliver about $1.1 million in annual savings for about $0.1 million in one-off costs, as part of the previously announced $2.5 million planned reduction in operating costs.
Moreover, the company is investigating various working capital facilities to close the timing gap between ordering equipment, customer billing and payment collection.
Consequently, management expects to be cash neutral over the period between now and the end of FY23. As a result of SenSen’s cost-saving efforts, the company believes that its cost base is relatively fixed and does not expect it to materially increase.
We recognise that macro issues and higher inflation could increase input prices but we believe these cost-saving efforts should help offset rising costs. Furthermore, many of SenSen’s newer contracts contain escalation clauses that pass through higher input prices.
At the current levels of operating cash burn and funding available, management estimates it has about 1.8 quarters worth of funding available. As such, we continue to assume a $2 million equity raise in FY23 to maintain a minimum level of cash.
SenSen expects to move into cash flow positivity and profitability shortly after the end of FY23. We thus anticipate free cash flow reaching positive levels by FY24, lessening the need for future capital raises to fund operations.