Total Brain Limited: Ready for Leverage

Business model
Total Brain operates a subscription as a service (SaaS) model for its mental health and fitness platform. The science behind the platform has been developed over almost two decades with input from the leading academic institutions in the field. This has generated a proprietary neuroscientific database of scale which underpins the scientific validation that differentiates Total Brain from other brain training and wellness applications. The app, promoted by affinity partners, assesses the four core brain capacities (emotion, feeling, cognition, self-control), pre-screens seven common mental health conditions and delivers personalised brain and mind/body training.

H1FY20 result and earnings adjustments
Total Brain announced H1FY20 revenues of $2.0m, an 8.7% decline on the previous corresponding period (pcp) and reflecting the company’s deliberate shift away from one- off revenue. The decrease was driven by a $0.7m decline relating to licencing of the i-SPOT scientific data which was recorded in the pcp. Offsetting this was a $0.6m increase in recurring SaaS revenues in the corporate and affinity markets. Management expects growth in this core business to accelerate over the coming quarters, reflecting the year on year 28% increase in Annual Recurring Revenue to $3.5m. Revenue for the half was below our forecasts, largely due to timing differences in corporate revenues coming on board. Costs were very well contained in the half year, rising just 1.3% despite a significant additional investment ($0.32m) in personnel in the half year. The cost containment was significantly better than our forecast, resulting the net loss for the half ($4.0m) being in line with our expectations. We have trimmed our FY21 revenues but also reduced cost expectations, resulting in no meaningful change to our FY21 forecast.

Base case valuation is $136.8m or $1.26/share
We use the discounted cashflow methodology to value Total Brain, arriving at a base case valuation of $136.8m which derives a per share valuation of $1.26. The terminal value in our base case valuation is $0.69/share. At the current share price, Total Brain is trading at a significant discount to a group of Australian SaaS peers focused on advancing solutions for human well-being. We see the advancement of the IBM Mental Fitness 360 programme to US veterans as the key near term catalyst for Total Brain’s share price.