Uncovering the next ACONEX: PAC Partners tips strong growth for archTIS
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PAC Partners analyst Mark Yarwood says parallels between data security company archTIS and billion-dollar tech success story ACONEX suggest archTIS (ASX:AR9) is significantly undervalued.
A new report by the independent research house puts a valuation of 21c on archTIS — a premium of over 1.5 times its current share price.
Like ACONEX, archTIS has partnered with business software behemoth Oracle.
ACONEX was a collaboration play in a project-based environment that subsequently reached a $1.6 billion valuation in 2018 following its acquisition by Oracle.
While archTIS is still an early stage software-as-a-service (SaaS) company, Yarwood highlights the company’s “attractive growth” and its strong potential user base across existing domestic government agencies with a total addressable market opportunity of $2 billion.
“With former defence minister Stephen Smith as chairman, this is a company with a very well thought out and deliberate strategy, focused on building a solution for a very specific problem,” Yarwood told Stockhead.
“CEO Daniel Lai and the team have been intimately involved in the government space, are very knowledgeable about the procurement processes through the Digital Transformation Agency and have strong relationships across the public sector.
“In a micro-cap, you have to have strong management and these guys are first class.”
The company’s product suite and solutions give government agencies and organisations the means to share and collaborate on their data in a secure way by applying policy-driven access controls at the user and information level.
Yarwood notes this “differential access” to confidential data is normally very difficult to achieve by traditional access and security systems.
“What archTIS have done is move towards information sharing at the attribute level as opposed to role based access control. This means you can have a finer granularity around accessing the data as opposed to just having one individual given security clearance,” Yarwood said.
“With archTIS, you can actually define at the individual component level, which granular part of information can be shared between different actors in the in the sharing environment.”
According to Yarwood, the complexity and scale of government defence projects represent a long tail horizon for archTIS to capitalise on, as opposed to the shorter-term project-based architecture of ACONEX.
Yarwood believes unlike ACONEX, archTIS’ proposition could offer a greater degree of stickiness with government departments less prone to cease the software’s implementation after a project completes.
“When you look at some of these defence projects [such as] building a submarine with a very complex supply chain or looking at government software more generally, once it’s embedded in the decision-making processes, I don’t think it’s retired easily,” he said.
“AR9’s product development strategy is also about adding more features which we see as translating to an increasing average revenue per user over time.”
PAC Partners highlights two key market segments archTIS is targeting as it looks to build its subscription-based revenue model.
Government – Yarwood highlights recent contracts secured with the Attorney General’s department and with Australia’s national criminal intelligence body, calling them a “potential game changer” for the company.
He points to the potential for the company’s Kojensi product to becomes the platform of choice for government agencies, as well as their industry partners and suppliers and the strong position that places archTIS in.
“AR9 is poised for commercial success and we rate the stock a BUY and see material uplift in valuation if its premier Kojensi platform is rolled out by ACIC,” Yarwood said in his report.
“Should Kojensi Gov be rolled out as the de-facto solution for ACIC there is material upside to our valuation (addressable market of 70,000 users).”
Defence – According to PAC Partners, defence will be the main driver for opening up secondary markets with multi-year projects necessitating collaboration with a range of industry suppliers and partners.
The Federal Government flagged increased spending in the 2019-20 budget and pledged to spend up to $175 billion over the next decade.
The PAC Partners Equity Research valuation is based on a discounted cash-flow (DCF) model factoring in assumptions around user growth.
Future cashflows are sourced from two income streams — subscription revenue and multi-user deals.
While archTIS has a well-established track record working in consulting to government, Yarwood notes this is the company’s first big foray into a SaaS-based product roll out and may require new skills and capabilities to sustain the company as it looks to scale up the SaaS business.
The reports flags that, like most early stage companies, a substantial part of archTIS’ commercial success will come down to its ability to protect its intellectual property and operate without infringing the proprietary rights third parties.
The calculations resulted in an indicative DCF valuation for archTIS of 21 cents per share, commanding a 55 per cent upside.
This valuation was determined using ARPU of $65 and contingent on the company onboarding 3000 users per annum between FY22 and FY25.