UCREST (0005) - Ucrest - The Russian World Cup Fever

Market cap: RM160m
TP (6-12 months): RM0.65
We hope our 2 write ups on M-mode and VisDynamics served you well. The world cup fever is here. This was a darling stock last year, when stocks was up almost 8x. Will this stock shine again this year? Remember IFCA did a 20x back in 2014. Story of Ucrest and iMedic...most of you would have known..
What is iMedic?
iMedic is Ucrest’s medical hospital cloud network platform, which is a complete patient information management system that stores patient’s medical images and datas. This will allow both patients and doctors to track uploaded data, and enables more efficient way of consultation through the “cloud”. This would also provide big data for hospitals and doctors to analyse its patients, bla bla... 
Why Russia?
Healthcare in Russia is provided by the state through the Federal Compulsory Medical Insurance Fund, and regulated through the Ministry of Health. The Constitution of the Russian Federation has provided all citizens the right to FREE healthcare since 1996. Ucrest saw a major breakthough last year when Russia’s Parliament, being the first government in the world to passed a new law mandate that its Federal Meidical Insurance Fund will subsidize its government hospitals for online healthcare services. Since August 2017, Ucrest had secured more than USD11.5m contracts, broken down to 19 sub contracts mainly from Trade House Atlantic, an associate of RKSS, which is part of Russian Technologies State Corporation. Each contract would cater to ONE hospital. If you do a check, Russia has more than 10,000 hospitals, and this could mean a market size of more than USD6b, assuming each hospital contract is worth USD600k. We compile the list of contracts secured here, where the average contract size is USD600k.
It stated that in the future, commercial providers of telemedicine services will also be able to join the system. MTS, one of the leading Russian call companies, has said that the Russian market in telehealth services in Russia will reach 18bn rubles (€260m or US$300m) within a year. The state IT corporation Rostech believes that, including equipment and IT systems, the sector might be worth 300bn rubles (€4.3bn or US$5.1bn) by 2020.
Ucrest current market cap is only USD40m, not even 1% of Russia’s IT systems provider projected value (USD5b)! And according to management, they only secures contract via a handful of state owned enterprise like Trade Atlantics. How about Keyasic Pte Ltd, which is a private company owned by Mr Eg. I believe the Keyasic Pte Ltd tenders contract from another company like Trade Atlantics to diversify its concentration to a single company. Companies that are aiming for contracts normally use a few subsidiary to tender to increase their chances of winning and to prevent monopoly, if you know what i mean here.
How about blockchain and AI initiative in new markets like China? We will tell you more about it next time when Ucrest is big in China..
With oil price surging to a new high, Russia, being a net exporter of oil, will have more budget to spend in healthcare. According to channel checks, management is expecting Russia to potentially double its budget in online healthcare this year, hence, we will expect more hospitals to be given this budget to employ online healthcare system. The ultimate beneficiary? None other than Ucrest.
Financial analysis
Contracts of Ucrest (iMedic software)
-Virtual Storage Platform v4.8– imedic for 10k license with a contract size of USD1m, which means per user basis, it is about USD100 per year.
-iMedic software and hardware licenses for 15k user at about USD565k, which means about USD38 per user.
-iMedic licenses for cloud platform at USD840k for 40k users, which is about USD21 per user.
Why is GPM of Ucrest as high as 50%?
From these contracts, we know that, a user license could cost about USD20-100, and a software person would know that part of it is hardware one off installation and part of it is recurring, meaning, if this license is continued next year, its software license revenue could recur again next year. And why is GPM of Ucrest as high as 50%?
Assuming Ucrest receives a contract of USD1m for 12 months for a particular hospital, and this hospital is happy with their software, 50% of USD1m would be recurring next year, ie, USD500k. How about margins? Hardware gross margins normally is about 10% while software could generate as high as 80% gross margins.
Ucrest will announce its Q4 FY2018 results in 2 weeks time. Could Ucrest repeat a RM3.5m profit for the quarter again? We believe they could, as its Chairman, Mr Eg Kar Yee have hinted previously that Q3 &Q4 revenue would be at least RM24m, and with the same GP margins, we could work out the profits for Q4 as well.
How do you value a tech company like Ucrest? Unfortunately, there are close to none listed mobile health companies we could find. But generally, a growing tech company like Ucrest deserve at least 15x forward P/E. This is why Ucrest is proposing for 20% placement to fund their further expansion, but due to weak pricing, they have delayed this plan. Sources have told us that there are a few well known investors who are interested to take a 10-20% stake in Ucrest.
From the deals we had sourced throughout the funding space, the fund raised for a few Electronic Health Record (EHR) companies were more than USD50m, namely:
(i) Modernizing Medicine, which makes a mobile-based EHR for specialists, raised $231 million from global private equity firm Warburg Pincus.
(ii) PointClickCare, which makes a cloud-based EHR platform and other software solutions to advance senior care raised $85 million in new funding.
(iii) Truveris, a healthcare technology company focused on cloud-based data analytics solutions for the prescription benefits industry, announced that it has secured $25 million in a new round of funding to accelerate its growth strategies.
And many more here…
At RM14m profit for FY2018 (May), if we peg at 15x, Ucrest should be priced at RM0.45 minimum. What will drive Ucrest to more than this then? If Ucrest can secure the same amount of contracts (about USD12m) in FY2019, our analysis shows us that, Ucrest could achieve RM24m profits in FY2019. How? We will show you after Q4 2018 is announced.
Technical analysis
Ucrest is attempting a reverse head and shoulder breakout, and when it happens, we will see price shoot up like a G6. With the world cup finals coming next week, will we see a huge rally for Ucrest?
Resistance:  RM0.365, RM0.455
Support: RM0.30
See you at RM0.55.
By Bagger Hunter