Clean energy and healthcare growth play
Dalrada Financial Corp (OTCQB:DFCO) (Dalrada Financial Corp (OTCQB:DFCO)) is a global company that holds a portfolio of subsidiaries comprising early-stage high growth businesses within three verticals — healthcare, clean energy and information technology. In this note, we re-examine the growth dynamics and potential valuation upside.
In the December quarter, Dalrada grew revenues eleven-fold over the corresponding period in 2020 to US$5.4mln. The growth was driven by particularly impressive performance in the diagnostic testing business which experienced strong growth in on-site COVID-19 testing services. The group ended the period with US$181k of cash while the accounts receivable position expanded by US$1.8mln over the quarter to stand at US$6.0mln. This was primarily due to the COVID-19 test receivables taking up to three months to collect and hence we expect the debtor position to unwind over the coming quarters. After the period end, the group raised around US$2.7mln via convertible debentures.
COVID-19 testing has continued to perform well since the period end; however, with the pandemic easing, we anticipate the testing business will shift and expand its focus on other diagnostic capabilities the company is currently researching such as DNA analysis, liquid biopsy, syndromic assays, antibody level testing and other laboratory services. The pandemic has also left a diagnostic backlog as many patients put off routine check-ups, and with mandates now lifted will create an influx of opportunities for the company’s Empower laboratory services.
We expect the clean energy segment to become an increasingly important revenue driver for Dalrada. The company showcased the application of Likido heat pumps in the hospitality industry at the AHR Expo (Air-con, Heating, and Refrigeration) in Las Vegas in the first week of February. Likido systems can provide hot water for rooms, laundry and swimming pools and provides free cooling with an efficiency of 800%. This means that 1kW of electrical energy produces 8kW of thermal energy. One LikidoONE in the USA produces 800 US gallons of hot water per hour at 160 Fahrenheit for an electrical input of 46.1kW while a gas-fired boiler would use 203kW. These systems provide energy savings of up to 75% compared with existing systems and offer an important step forward for customers in terms of achieving their net-zero targets, with a 93% reduction in carbon equivalent emissions. Other applications for Likido heat pumps include industrial processing facilities, data centres, industrial drying, climate control facilities, district heating & cooling, pharmaceuticals, plastic packing recycling, food processing and energy harvesting. The company is currently installing its first three units in Spain and has a growing pipeline in the UK, EU, US, and Mexico. Furthermore, with recent fossil fuel prices on the rise, many countries are accelerating programmes for heat pump manufacturing to decarbonise heat. Consequently, we anticipate accelerating revenues from Likido through calendar years 2022 and 2023.
We will reassess our forecasts following the third-quarter results in May.
Strong revenue growth
Below, we examine the potential valuation upside for the stock price. We consider three revenue scenarios for the full year (FY) to the end of June 2023, and three potential revenue multiples to drive the stock price. Our central scenario of US$100mln of revenue and a 2.5x revenue multiple would equate to a share price of US$2.14, suggesting 386% upside to the current stock price (on an undiluted basis).
We believe that revenue acceleration during the next quarters, together with an increased market understanding of the potential market for the Likido products, could act as catalysts for a re-rating of the shares.
Scenario analysis
In valuation terms, we believe it is instructive to look beyond FY June 2022 and consider some valuation scenarios based on 2023 revenue. We consider scenarios based on:
- FY June 2023e revenue of US$50mln or US$100mln or US$150mln
- A valuation multiple of 2x revenue or 2.5x revenue or 3.0x revenue
We argue that revenue multiples of 2-3x are realistic for a company that is capable of delivering >20% operating profit margins going forward, with strong revenue growth for several more years. Under each of the 2023 revenue scenarios, we are assuming (to different degrees):
- A shift in diagnostic testing business with ongoing COVID-19 testing and ramp-up of other laboratory services
- A substantial ramp-up of revenues from Likido heat pumps and related systems, meeting worldwide demands
- Growth from the other Dalrada businesses
We believe these are realistic expectations based on the current trajectory of the business units.
The following table summarises the valuation scenarios.
Catalysts and upside
Source: Proactive Research
In order to convert these valuation scenarios into present-day share price terms, we apply a 40% discount for execution risk.
Therefore, in the central scenario of US$100mln revenue and 2.5x revenue multiple, we would have the present-day enterprise value (market capitalisation adjusted for cash and debt), at a 40% discount, i.e., US$250mln minus 40% = US$150mln.
Net cash balances are currently close to zero, meaning that the market cap is the same as the enterprise value and therefore –
Present day share price equivalent = US$150mln divided by 70.18mln shares = US$2.14.
This would imply a 386% upside to the current stock price, before including the impacts from potentially dilutive instruments. We argue that the Dalrada stock price offers substantial upside potential, based on the potential revenue expansion for the Likido product line and continued progress in the other businesses.