Keeping abreast of the latest broker views can be a worthwhile exercise. Sometimes they flag up opportunities that are worth exploring further. Take Kooth (LSE:KOO), for instance. This is an almost-penny share currently trading well below where analysts think it could be in 12 months’ time.
Let’s take a closer look at this under-the-radar small-cap stock.
Digital mental health platform
Kooth is a leading provider of digital mental health services for young people. Its platform offers support, therapy, and wellbeing tools to schools, health systems, and public bodies.
According to NHS England data, it’s now the largest single access provider for mental health support for under 18s. Kooth also has a growing presence in the US, where it has a contract to provide online mental health services for all residents aged 13 to 25 in California.
The reason I refer to Kooth as an ‘almost’ penny stock is because it has a small £50m market cap, but doesn’t trade for pennies. Each share costs 140p (£1.40).
Things I like
At first glance, there are a number of things I like here. For starters, Kooth operates a digital platform with recurring revenue. These can be much more profitable if and when a certain scale is achieved.
Second, the firm is operating in a growing market. Young people these days are sadly suffering more mental health issues due to various factors, including social media addiction and insecure employment prospects. Consequently, demand for Kooth’s services should rise over time.
The fact that the company was able to secure a contract with California highlights the trust placed in its platform (called Soluna). It has reached over 130,000 young people, in all 58 counties, in just 18 months since launch. And it remains on track to exceed the California Department of Health and Care Services’ targets for 2025.
Looking ahead, it’s possible other states could adopt the platform, driving significant long-term growth. It’s already working with New Jersey, and is expanding the services it offers. It’s on track to launch Soluna in the UK in 2026.
Finally, the balance sheet is strong, with £15.3m net cash and an undrawn $9.5m facility.
Huge potential, say brokers
As for negatives, I see a couple of things here. One is that the company has been investing heavily in direct marketing in California to raise user awareness. In the first half, this resulted in gross margin compression and a huge fall in adjusted EBITDA (down to £1.6m from £7.8m). The post-tax loss was £1.3m.
With these investments made, things are expected to improve in the second half. But this shows that the company’s profitability is still quite precarious at this stage. And there’s currently not much revenue growth forecast for the next couple of years.
Another risk is the key California contract. If this isn’t renewed in 2027, it would be a major blow.
All things considered, the low level of top-line growth doesn’t appeal to me, so I won’t be investing. But it’s worth noting that Canaccord Genuity and Berenberg Bank both maintained Buy ratings on the stock this week.
And while they lowered their price targets, these are still each significantly above the current share price. Indeed, Berenberg’s target of 430p is 207% higher!
On this basis, the small-cap stock might be worth further research.
