Induction Healthcare Group — Evolving technology in healthcare

Induction Healthcare is a UK-based healthcare technology company, providing various software products that integrate with incumbent platforms used by the UK’s National Health Service (NHS). Its products can be easily integrated to improve efficiency, which differentiates it from digital healthcare companies aiming to disrupt existing models of care, which trusts can be reluctant to adopt. Its main products include: (1) Attend Anywhere, a leading provider of virtual consultation software that can sit on a hospital’s patient administration system, (2) Zesty, a patient portal that allows patients to manage their health care, and (3) two healthcare collaboration apps (Guidance and Switch). It operates in the secondary care market, where public funding is c 2.5x higher than in primary care in the UK. The company is benefiting from the NHS’s drive to streamline processes through digital transformation, where its products address many of the objectives of the government’s 2019 long-term plan. Additionally, through a buy and build strategy, we believe there is scope for the group to expand into new geographies and into verticals outside of healthcare.

FY22 was a transformative year for Induction Healthcare following the acquisition of Attend Anywhere in June 2021, which drove an 8x increase in revenues to £12m and a move to adjusted EBITDA break-even. Attend Anywhere’s recent contract renewals with NHS Scotland, Wales and England, saw higher than expected customer retention, and in England saw increases in contract value and length. Attend Anywhere’s contract win with the Department for Work and Pensions (DWP) illustrates Induction’s ability to grow outside of healthcare. Zesty, a digital patient portal and its second biggest revenue driver, saw a substantial increase in ARR, up c 100% y-o-y. Management now believes there is scope to significantly increase the adoption of Zesty ahead of its original expectations, underpinned by the government-led drive for digital adoption within healthcare. We forecast that Zesty will be its fastest growing product at a two-year CAGR of 68%. The group has net cash of £8m, which it will use to invest in development, delivery and commercial resources. We forecast revenue growth of 45% (25% organic) and 19% in FY23e and FY24e respectively. We also expect good control over the cost base to deliver EBITDA margin expansion.

We value Induction on an EV/sales basis, as it only broke even at the adjusted EBITDA level in FY22 and will take a while to build its EBITDA margins. On EV/sales, Induction trades at a small discount to its healthcare software peers and a bigger discount to a basket of European software-as-a-service (SaaS) providers. Were the shares to trade at EV/sales parity with all the peers for FY23e, the implied share price would be 73.4p, suggesting an upside of 51%. To begin closing this gap, Induction would likely need to continue making accretive acquisitions that complement its existing products, enter into partnerships that can extend Induction’s reach and continue expanding into new geographies.

Buy and build is key to management’s growth strategy, so there is a risk that an acquired company may not perform to management’s expectations. There is also the risk that Induction may not be able to develop an acquired product to management’s expectations. Both risks could be exacerbated if the group acquires a company to expand into an unfamiliar market or region. Additionally, there are sensitivities around customer concentration, and the potential for heightened competition borne from new technologies that may render Induction’s products obsolete.

Induction Healthcare is a UK-based healthcare technology company providing software that helps providers and patients choose how and when they receive care, with the mission to ‘Make healthcare better, anywhere’. Its four key products help streamline the delivery of care via video consultations, a patient portal, internal communications and the provision of guidance from one aggregate source. The company was founded and listed on AIM in 2019, with its founders, Dr Hugo Stephenson and Ibraheem Mahmood, wanting to leverage their corporate finance backgrounds to build a healthcare technology company that could scale quickly. Both had experience in developing healthcare and technology companies and believed there was an opportunity presented by the UK government-led drive to increase the digitisation of healthcare.

In 2019, the UK government published its long-term plan, aiming to improve efficiency and the use of technology within healthcare. Since then, the company has built a strong track record of success within the NHS, with at least one of its products used in 230 out of the 231 hospital trusts in the UK. Part of its success lies in its strategy of ‘evolution not revolution’, which aims to mitigate resistance from clinicians to adopt brand new technologies by offering add-on solutions that integrate with existing software that they may have already become accustomed to. Its solutions provide patients with greater flexibility than has historically been made available through brick-and-mortar models, by advancing the range of in-person and digital care options.

Underpinned by the founders’ corporate finance background, management believed the optimum way to scale was through a buy and build strategy. It acquired its first product, Switch, from Podmedics in 2019 and then employed a freemium strategy to rapidly build its user base in the NHS (offering basic features for free and then charging for supplemental or advanced features). Following its initial public offering (IPO) later that year, the company quickly acquired Horizon Strategic Partners (Guidance) and then Zesty and it was able to leverage its user base within the NHS to cross-sell these products.

On 9 June 2021, Induction acquired Attend Anywhere for £25m (a mix of cash and shares; see the Financials section). Attend Anywhere has been transformative for the group, driving an eightfold increase in revenues to £12m in FY22e.

Induction currently operates in the UK’s secondary care market (hospitals and specialists) and believes it represents the largest opportunity, where, according to management, public funding is c 2.5x higher than in primary care despite lower patient footfall. However, most of Induction’s products can be used in a variety of settings, which should allow it to expand into primary and tertiary care, as well as verticals outside of healthcare. Attend Anywhere’s recent contract win with the DWP provides evidence of the opportunity in verticals outside of healthcare.

Induction has built a successful track record within the NHS, where 230 out of the 231 hospital trusts in the UK use at least one of its products. Management acquired and developed products with the aim of improving efficiencies within the secondary market, with upselling and cross-selling being a key part of the strategy to leverage an expanding product base. The company is a pure software provider, allowing for products to be high-margin and scalable.

Currently the company sells four key products, including:

All its products are white label and can be seamlessly integrated with existing third-party software. This preserves existing workflows and enables customers to continue using systems that they have invested significantly in and may have become accustomed to, such as PAS or electronic health record (EHR) applications.

Induction’s proprietary HealthStream product provides a real-time bridge between a trust’s local systems and Induction’s secure environment in the UK’s Health and Social Network (HSCN) – a data network for health and care organisations. Importantly, this drives many of its products, such as Zesty and Switch, but it also has the potential to generate immediate value for acquired software, which may not have the same application programming interface (API) functionality.

Attend Anywhere (Near Me in Scotland) is a market-leading video consultation platform for secondary care and it is now Induction’s primary revenue driver since it was acquired in June 2021. The software aims to mirror the end-to-end workflow of a physical hospital visit, while also offering the additional benefit for consultations to be delivered at a location convenient to a patient.

Attend Anywhere offers several advantages over standard conference platforms such as Zoom or Teams, including:

We discuss the financials in more detail later, however we believe that Induction’s recent contract renewals are important to mention here as they highlight the value-add among its customers. First, its renewal with NHS Wales in 2021 saw expansion in scope and uplifts in contract value. In NHS England, it retained 94% of contracts, which was far higher than management’s expectations for larger churn following the shift from national to regional procurement, and equates to 68% share of all trusts (ie acute, specialist and community trusts).

As a pure software provider, Attend Anywhere can also be sold outside of healthcare to other verticals. Its recent deal with the DWP highlights this possibility, where its SaaS capabilities allow it to be deployed at scale to address ubiquitous concerns of efficiency and privacy in any consultation environment. The contract was won through Induction’s partner Involve Visual Collaboration, a UK video specialist, for two years to support the virtualisation of the UK benefits system. Specifically, Induction would supply DWP with Attend Anywhere so that members of the public can hold video consultations with DWP assessors regarding their financial support needs, as an alternative to a face-to-face meeting.

However, further deals in other verticals will likely happen in the longer term as management believes there is still significant scope for growth within healthcare.

As highlighted by its recent contract wins, Induction has a track record of being able to expand the scope and thus increase contract values upon renewal, which can happen frequently as contracts typically range from one to three years. However, given its large share of the NHS across the UK, we believe that the greatest opportunity to scale the platform will be through international expansion in countries that have similar public healthcare infrastructures to the UK, such as Canada, Australia and several European countries (Germany, Italy, Spain etc). Operational barriers may make it challenging to grow internationally but could be made easier through targeted acquisitions.

Zesty was acquired in the summer of 2020. Zesty’s platform provides an integration layer with a hospital’s EHR and/or PAS software and a portal for patients. Currently, UK hospitals still use a variety of systems across hospitals or specialities, leading to inefficiencies and a sustained need for manual processes. This creates significant overhead costs: management believes a hospital may require c 100 administrators for every 100,000 patients. Zesty aims to alleviate some of these administrative burdens by providing a digital front door for patients, giving them access to data from a wide variety of third-party clinical systems, including Cerner Millennium, System C Careflow and SilverLink PCS Acute, in a centralised platform. The company has yet to integrate with Epic, the other remaining major system.

Zesty’s proprietary HealthStream engine integrates with an array of clinical systems, with the aim of joining up care and building a well-functioning ecosystem. Its ability to integrate on a two-way basis with a large variety of systems is a competitive advantage for Induction, as management believe its competitors would likely have to invest significantly to attain the same API capabilities.

When hospitals use Zesty, features include:

A Royal Free London NHS Trust case study highlights the value Zesty provides. The trust used Zesty to develop the ‘My RFL Care’ app, which saw more than 50,000 patients register in the first four months. For every 100 patients invited to create an account on the portal, 63 successfully did and used the platform at least once, highlighting the attractiveness of the Zesty platform for patients.

Horizon was Induction’s first acquisition post IPO and was bought for its product MicroGuide, which became Guidance once under the Induction brand. Guidance is an app for doctors (available on mobile or desktop) that allows them to provide homogenous clinical guidance for all patients in a given trust or organisation as well as internal guidance for processes such as doctor on-boarding. Historically, guidance was shared on paper among the trusts in a region, giving rise to disparities in the advice given across hospitals. Guidance addresses this by offering a system akin to a ‘Dropbox’ for doctors, establishing a central depository for clinicians. The content management system can support any kind of guidance, with more than 50 different types currently available ranging from anti-microbial, e-learning, doctors on-boarding, to pain management. A key example is the provision of localised rules for responsible antimicrobial use, laying out the guidelines for which antibiotics should be used for a particular illness. A Southampton case study found that Guidance supported careful antibiotic prescribing, leading to a fall in Clostridium difficile infections from 60 a month to less than 10.

Guidance is used in over 50% of NHS England hospitals and consists of several modules: Governance & Review, Patient Information and Decision Support, as well as a Secure Guide feature. The Governance & Review module ensures that guidance given on the app can be regularly reviewed by doctors to ensure that it is up to date and complies with regulation. Patient Information allows a medical organisation to tailor guidance specifically to its clients and provides patients with additional advice by showing related content and also includes powerful search functionality. Decision Support enables medical specialists to stratify guidance for a drug or other treatment choices depending on the characteristics of a patient’s condition or profile. The Secure Guide feature enables medical organisations to create and publish guidance to smaller, more discrete subsets of their clinical population. Guidance contract values are relatively small, ranging from £1–5k per annum.

Switch was Induction’s first product and its only one when it listed. The platform offers a productivity toolkit that helps clinicians and hospital staff save time by connecting them to people and the information they need together on one platform. The services include directory listings, secure messaging and the ability to share workflows and patient information, which can all be done either on or offline.

Switch was Induction’s first acquisition and bought under the name Podmedics. Once under the Induction brand, its user base went from 30k to now over 200k, available and actively used in every NHS trust in England. Management offered the basic version of the product for free to expand its user base, with the intention of upselling customers to the product’s more advanced features (freemium strategy). This also established trust among its users for Induction’s other products (eg Attend Anywhere, Zesty), resulting in cross-selling opportunities.

As shown by Exhibit 6, an NHS Lanarkshire case study highlights the value Switch provides, with 15 junior doctors reporting a significant decline in reporting problems in three main areas: referring to specialities, requestion investigations and finding guidelines. The study also showed that 100% of the doctors felt that the app saved time and that c 70% of them used the app at least once per month.

The NHS, Induction’s largest customer, is undergoing structural changes with the UK government aiming to streamline processes through both consolidation and digital transformation. The inefficiencies the government is trying to address, such as long wait times and the difficulty for patients to access their own patient records, have resulted in patient frustration, worsening clinical outcomes and high administrative costs. We expect that cost burdens will worsen with rising medical inflation.

Induction’s products have a track record of improving efficiencies within the healthcare market, and its experience working with the NHS makes it well-placed to capture the opportunity. Moreover, we note that Induction’s products have potential to expand outside of the UK and in verticals outside of healthcare.

Each of the UK’s four countries control their own NHS services. In each country, trusts can procure technology directly, although increasingly in England, procurement is being managed at the integrated care system (ICS) level (see below). With funding being made available at the ICS level for digital services, this is likely to accelerate the shift of procurement from local trusts to ICSs.

Following the publication of the NHS long-term plan in 2019, there has been an emphasised shift to consolidate the regional model from many fragmented clinical commissioning groups (CCGs) into 42 integrated care systems (ICSs), as shown in Exhibit 7. This is part of the concerted effort to streamline the decision-making processes for the allocation of resources, the design of services and improvement of the population’s health. Consolidation is set to be complete by July 2022 (previously April 2022) and should lead to a more equitable distribution of resources across health and social care providers, a more integrated approach to health and social care provision and help to relieve some of the current pressures facing the NHS.

Funding the improvement of the digital capabilities among all the NHS trusts is a key part of the government’s 2019 long-term plan, which focuses on making data more available to patients and technology providers to open new opportunities in prevention, care and treatment. The widespread adoption of Induction’s products in 230 of the 231 the NHS Trusts highlights the company’s trusted partner status and we therefore believe it is well placed to drive further digital adoption in the space.

The UK government’s plan focuses on several areas in which Induction specialises, including:

Management believes that simplifying the patient journey is necessary to deliver care more effectively. Currently, the number of clinical pathways is increasing due to improvements in medicines and technology, but the capabilities of hospitals’ administrative systems are lagging behind. The company believes that this mismatch can be addressed by its integrated approach. As add-on products to existing software, Induction’s products should help preserve existing clinician workflows and thereby mitigate potential resistance to digital adoption.

Public funding for health services in England rose steadily from 2007 to 2020, followed by a step change increase in spending due to COVID-19. As illustrated by Exhibit 8, the King’s Fund expects NHS funding at its core level to increase, moving from £143.9bn in 2020 to £176.4bn in 2024, equating to a 5.2% CAGR.

Typically, a portion of funding is allocated to an ICS based on the clinical requirements for a region. However, the government can use pump priming to catalyse the use of a product/system across the market, meaning it commits to investing for a determined period outside of a hospital’s budget. This was the case with Attend Anywhere, which received national funding for five months pre-COVID-19, led by NHS CEO Simon Stevens, who released a report saying that he wanted to reduce footfall in hospitals by 30%. Attend Anywhere was key to achieving this as around one-quarter of a hospital is made up of the waiting area, so it makes sense to digitise this with either remote video or asynchronous solutions.

After the pandemic started, Attend Anywhere usage accelerated substantially, with 3m consultations delivered on the platform in its first year in NHS England, equating to one of the fastest roll-outs of a single technology in NHS history according to an Edge Health report (Edge Health is a UK health and care analytics company).

At the end of 2021, the same Edge Health report reviewed the success of video consultations in secondary care and in addition to identifying cost savings for the trust, it noted the benefit to patients because of reduced travel and waiting times, avoidance of potential hospital-acquired infections and averted productivity losses for patients having to miss work.

This underpins the value of Attend Anywhere within secondary care and illustrates how management were able to retain 94% of NHS England trusts, despite funding moving to a regional model.

In the UK and globally, there is a large range of healthcare technology companies aimed at improving the delivery, efficiency and quality of care. The NHS defines three main types of technology: point-of-care applications (mainly focused on supporting clinicians to deliver care and includes EHR, PAS, medicines management software), patient-facing applications (to access primary, community or secondary care), and back-end applications (often including a database, usually national in scope). Induction’s software is designed to integrate with point-of-care applications, either to help clinicians in the delivery of care or to allow patients to manage their own care. We have identified a selection of UK providers that can compete directly with Induction:

We believe this competitive landscape also highlights the opportunity for consolidation, where Induction could leverage its buy and build strategy to provide a greater range of options under one umbrella brand.

Unlike most digital health providers, Induction develops product-agnostic software that does not require the onboarding of specialists, such as doctors, which could expand its addressable market beyond healthcare. A report by Deloitte showed that digital adoption across public departments is being driven by budget pressures, as well as from citizen demand. Its study from over 70 countries showed that nearly 70% of public sector departments believed they lagged their private sector counterparts when it comes to digital capabilities, which increases to 75% when looking solely at the UK.

We believe that most of Induction’s products could address some of the inefficiencies caused by antiquated analogue operating models. The recent Attend Anywhere deal with the DWP provides tangible evidence that this is a possibility; we note there are 23 ministerial departments it could possibly work with. Management used the UK’s Ministry of Defence as an example of an organisation that would benefit from Attend Anywhere’s capabilities, with security being a top priority.

Since its inception, Induction has acquired and developed four products, providing organic growth opportunities as the NHS goes digital and as result of cross-sell/upsell to clients. The company is keen to expand customers of AA to its flexible care platform (AA+Zesty+Guidance+Switch) and estimates that this could expand ARR per ICS from £180k to £700k.

M&A remains at the core of its strategy, where it will be used primarily to expand into new territories as well as grow its product range. Developing strategic partnerships will also be key to achieving both.

M&A has always been core to Induction’s business model, where the founders believed that they could leverage their corporate finance backgrounds to develop a scalable healthcare technology company.

The company’s main M&A focus now is to acquire companies that can accelerate its entry into new geographies, by helping it mitigate potential operational barriers. The company has also used M&A in the past for product development, which will continue to be key to its growth strategy. Further acquisitions should help diversify revenues and potentially reduce customer concentration (the NHS is currently its largest customer at an estimated 95% of revenue).

As part of its strategy for incremental innovation, rather than disruptive, acquired companies will ideally produce software that can integrate with existing systems to allow for the preservation of existing workflows, thereby reducing resistance from staff who are unwilling to learn a new system.

Induction now targets acquisitions that are accretive to growth and profitability, where they should ideally have a similar ARR-driven SaaS business model to make it easier to integrate into its existing platform. This acquisition strategy follows the success of the Attend Anywhere acquisition. Attend Anywhere generated revenue of £10.4m and EBITDA of £4.5m in the year to 30 June 2021, supporting Induction’s move to EBITDA break-even in FY22. Management can then use its experience in the market to accelerate revenue growth, while employing economies of scale to reduce costs and drive efficiency.

Induction already has a small presence outside of the UK, including in Ireland, Australia, the United States, Mexico and South Africa. For example, the Attend Anywhere management was based in Australia and Induction plans to launch Attend Anywhere there with the aim of generating revenues in Australia in FY23. There is scope to expand in this list of geographies, as well as those with public healthcare infrastructures, which we have identified in Exhibit 9. The map illustrates the significant opportunity to diversify revenues outside of the UK.

Acquiring companies in targeted territories would accelerate entry in those markets, primarily by reducing operational barriers. Once in a new region, the company can employ its land and expand strategy to cross-sell its products, which have a track record of success in the UK’s public healthcare market.

The UK healthcare market is currently fragmented, consisting of many point solution providers, often with low user bases and only a modest number of customers. Through consolidation, management believes it can reduce the number of systems that healthcare professionals rely on, while also maximising potential efficiency savings. Once present within a trust, the company is well-placed to cross-sell its other products.

We note that Induction can develop and integrate its own technologies once a product is acquired. In 2021, the company launched Booking as an add-on feature to Zesty, which saw multiple regional contract wins to facilitate COVID-19 vaccinations and the delivery of home antibody tests. Management intends to continue investing in its technology to add more features to existing modules, which they believe will not only give rise to upselling opportunities but will also make products stickier.

Unlike many telehealth providers that aim to disrupt the market, Induction intends to provide incremental and evidence-based solutions. It achieves this by evolving pre-existing systems, which health providers may have become accustomed to and may have invested millions in. This ensures minimal disruption to existing workflows, which management believes is key to user uptake and adoption. Unlike many telehealth providers, Induction does not provide clinical services – its pure software offering is scalable, high margin and does not compete with its customers’ clinical work.

Induction works with third parties to accelerate growth in either new geographies or verticals outside of healthcare. Currently, a primary sales partner is Involve, a UK-based video specialist with over 30 years of experience delivering audio visual and collaboration solutions across healthcare, corporate, legal and public sector markets. This partnership was key to Attend Anywhere’s DWP contract in November 2021. The contract had an initial value of £2.6m spread over two years, with the chance to double this to £5.2m if the contract is extended to four years. Induction also collaborated with Involve to win its contract with Health Service Executive, the Republic of Ireland’s publicly funded healthcare system.

Elsewhere, Induction entered into a value-added reseller agreement with Cerner Corporation in October 2020, where NHS Trusts that are already Cerner clients can access Zesty’s patient portal without the need to go through a protracted procurement process. This partnership could also provide a channel to international markets, where Cerner has a substantial footprint.

Induction’s products can provide solutions for problems that may be faced by large healthcare and technology providers. An example of this was Induction’s agreement with Milton Keynes University Hospital NHS Trust, which saw one of the first UK roll-out of secondary care health records on iPhones through the Zesty platform. Cerner and Apple partnered with Induction for this roll-out, with Zesty providing patient authentication and onboarding. Induction’s management believed both partners recognised clear value from the ability to consolidate Cerner’s electronic patient records on to the iPhone’s health app. Cerner sees higher utilisation of its digital health records, Apple can now provide this service to its customers, and over 70,000 patients now have greater autonomy over their health care.

Induction Healthcare’s board consists of the chairman, CEO, CFO and four non-executive directors. Christopher Samler recently replaced Chris Spencer as chairman on 7 June 2022, having previously held roles as CEO and chair of several quoted and private companies, in the education, healthcare, services and technology sectors.

James Balmain joined the board as co-CEO in June 2020, following the acquisition of Zesty, which he co-founded in 2012. His time at Zesty gave him valuable experience dealing with the NHS at a commercial level. In September 2021, James became sole CEO after Hugo Stephenson took on a new role as global executive director. The CFO is Guy Mitchell, who has worked at Induction since August 2021 and has previous experience as interim CFO at AIM-listed FreeAgent, and Oxehealth, a SaaS medical software producer. The executive team includes CTO Dave Williams, who joined from Just Eat in September 2021. Biographies are provided on page 20.

One of the co-founders, Hugo Stevenson, remains involved with the company. He recently stepped down to the non-executive director role he originally held on admission to AIM in May 2019.

Induction Healthcare primarily sells into the secondary care market. Revenue is mainly generated from licensed subscription services, but it also collects fees for initial set-up services. Management’s experience is that the public sector does not like open-ended contracts, so fees remain fixed throughout the life of a contract and do not change with usage. Contracted business is a key performance indicator (KPI) for Induction, as it provides robust short- and mid-term revenue visibility.

Historically, contract sizes have been relatively small and contract lengths circa one year, where cash collection occurred either upfront or quarterly. As management built a track record of success within the NHS, it has been able to win significantly larger contract sizes with longer term lengths.

Many of its renewed contracts are now also paying for the entire term length upfront, representing a substantial increase from collecting cash on an annual or quarterly basis. The company only recognises revenue once the project has gone live, which is positive for working capital. Revenue and the associated costs are amortised over the length of the contract.

The size of a contract is dependent on the product sold and end-customer. We highlight a few examples below:

FY22 has been a transformative year for Induction following the acquisition of Attend Anywhere, which drove an 8x increase in revenues to £12m and a move to broadly EBITDA break-even for the year ending 31 March, as reported in the company’s trading update of 21 April. We expect full year results to be reported in July.

In its FY22 trading update, both revenue and EBITDA were in line with the already upgraded market consensus. ARR was reported to have grown to £15m, providing good visibility for FY23 and beyond. Its performance was supported by Attend Anywhere’s recent contract renewals with NHS Scotland, Wales and England, which saw higher than expected customer retention, as well as some increases in contract value and length. Its contract win with the DWP also illustrates Attend Anywhere’s ability to grow in verticals outside of healthcare.

Attend Anywhere was acquired on 9 June 2021 and hence was included for just under 10 months of FY22. Its H122 revenue contribution (for just under four months) was £3.6m (the interims disclosed that it would have been £5.9m if it had been owned for the full six months). Its full year contribution will be disclosed with the final results.

Zesty, its second biggest revenue driver, also saw a substantial increase in FY22 ARR, reported in the trading update to have been up c 100% y-o-y. Management now believes there is scope to significantly increase the adoption of Zesty ahead of its original expectations, underpinned by the government-led drive for digital adoption within healthcare.

The company’s move to EBITDA break-even in FY22 benefited from acquiring Attend Anywhere, which offset ongoing losses elsewhere. Attend Anywhere had delivered positive EBITDA of £4.5m in the 12 months to 30 June 2021 (and it contributed net profits of £1.99m to the H122 results).

Induction’s FY22 trading update reported year-end net cash of £8m (March 2021: £2.5m). In June 2021 it raised gross proceeds of £25m via a placing of 35.7m shares at 70p. At the same time, it acquired Attend Anywhere for £16.3m in cash and the issue of 14.3m consideration shares worth c £10m. Management intended to use the funds raised for product development, delivery and commercial resources.

The trading update reported that the cash balances have increased since March 2022 due to strong renewals of NHS England Attend Anywhere contracts. While in the near-term, the company is targeting organic growth, in the medium-term M&A will the main driver of growth.

Induction views contracted business as its primary KPI, with a contract’s fixed value providing revenue visibility. This drives our revenue forecasts, with Exhibit 11 illustrating that the company has already contracted c 70% of our FY23 revenue forecast.

We expect that Attend Anywhere’s revenue will drive Induction’s growth. Aside from expected underlying growth in FY23 (which we estimate at 18%), it will contribute for the full 12 months versus just under 10 months in FY22.

Attend Anywhere recently won contracts with NHS England, Scotland and Wales, as well as with the DWP, equating to £11.5m in contracted revenue for FY23 (£9.7m in FY21, £10.3m in FY22). We assume that management can win two contracts in the year with a total value of £3m, which we believe is achievable given recent contract wins.

We use the same process in our FY24 forecasts. However, we also assume a c 80% renewal rate for those contracts with a term length of 12 months, which seems conservative given that the company typically delivers a retention rate of over 90%.

Looking at profitability, we believe the company can maintain control of its operating costs as it continues to scale. The company capitalises development costs, which have historically been high relative to revenues: in FY21 capitalised development costs were 110% of revenue. Following the Attend Anywhere acquisition, and the subsequent rise in group revenue, we believe capitalised development costs will fall relative to revenue. In FY22, we expect capitalised development costs to be 25% of revenues and remain at similar levels in the medium term, reflecting planned investments in its technology and R&D team.

Our EBITDA estimates are in line with management’s guidance, which show the company moving to EBITDA profitability by end-FY23, followed by further margin expansion in FY24.

We believe that growth in profitability and a move towards positive free cash flow should help Induction maintain its robust net cash position. We estimate that total cash burn will be c £2m in FY23 and FY24, which will mean Induction may not need to conduct any additional fund-raisings. However, we note that management may need to raise capital if it intends to make any further acquisitions.

Below, we show Induction’s valuation against global small-cap healthcare technology providers and a selection of European SaaS companies. We have used European SaaS companies to provide a more direct comparison to Induction’s operating model, as many of the healthcare technology providers are not SaaS and have different operating models.

We do not believe a discounted cash flow is appropriate given the company’s limited track record and loss-making history.

We value Induction primarily on an EV/sales basis, as we forecast the company will remain loss-making at the reported PBT level in FY23 and FY24 and it is only just beginning to expand its EBITDA margins (to 12% in FY24e).

On EV/sales, Induction trades at a slight discount to its healthcare technology peers but is at a significant premium on EV/EBITDA in FY23 and FY24, reflecting how Induction is earlier in its profitability cycle than many of these peers. Looking at our basket of SaaS peers, Induction trades at a greater discount on EV/sales across FY23 and FY24 at an average of 43%. It still trades a large premium on EV/EBITDA across both years, but less significantly than with the healthcare technology companies.

Were the shares to trade at parity with all of the peers on EV/sales for FY23, the implied share price would be 73.4p, suggesting an upside of 51%. To begin closing this gap, Induction would likely need to continue making accretive acquisitions that complement its existing products, enter into partnerships similar to those with Cerner and Apple to extend Induction’s reach, and continue expanding into new geographies.

Our forecasts and Induction’s share price could be sensitive to the following factors: