KOOTH PLC (KOO) — Research Note

Executive summary

Kooth is a UK-listed digital youth mental-health platform (Kooth/Qwell/Soluna) selling into UK NHS commissioners and US state governments, with California now representing the anchor contract (71% of 2025 revenue) and additional footholds in New Jersey and Michigan. Across the filings the operating trajectory shifts from ~£11.7m H1 2023 revenue and near-zero EBITDA, through a 2024 revenue-doubling to £66.7m on the California go-live (Adj. EBITDA £15.8m), to a 2025 mild reversal (£63.3m revenue, £11.3m EBITDA on FX/product-dev tapering) and H1 2026 that shows margin recovery — 74.1% gross margin, £5.3m EBITDA (+102%), £23.1m net cash, PAT of £2.0m 2026-09-23 half year, 2026-04-08 FY25. The single most important valuation point today is the tension between a very cheap headline (~0.7x EV/ARR on a 74%-GM subscription model with net cash equivalent to ~35% of mcap) and heavy customer concentration on California's DHCS contract, currently in year 4.

Fair value estimate

• Range: 200p – 320p per share, implying market cap £73m – £117m (mid ~£95m at 260p).
• Methodology: blended EV/ARR (1.2–2.2x on £61.4m constant-currency ARR), EV/EBITDA (7–11x on £10–12m 2026E Adj. EBITDA), sanity-checked with a scenario DCF assuming a haircut for California renewal risk from mid-2027.
• Key assumptions: (i) California renews in some form beyond current term; (ii) 2026 EBITDA broadly in line with 2025 (£11.3m guidance-implied); (iii) £23.1m net cash treated as fully available; (iv) 74% gross margin sustainable once direct-marketing normalises; (v) no material US pipeline monetisation in the central case.
• Vs. £66.8m current cap: upside ~+42% to mid, +75% to high, +9% to low.

Sector context

Confirmed classification: Technology / vertical SaaS with clinical services. Kooth's profile — 100% recurring revenue, 74% gross margin, net cash, mid-cap-tech growth optics but small absolute size and heavy single-customer exposure — is above typical AIM Technology peers on margins and balance sheet quality, but below the "clean SaaS" average on customer concentration and geographic mix. Listed comparables are imperfect: US telehealth/behavioural specialists (Talkspace, Hims, LifeStance) trade on very different economics; the closest UK-listed peers are small-cap healthtech names such as EMIS Health (before delisting), CareTech-adjacent operators, and specialty B2G tech such as NIOX Group or Craneware (US-listed) — none is a true peer.

Investment thesis

1. Anchor US contract now demonstrably embedded and expanding. California Soluna is in year 4 with 187k registrations, a state-level LEA integration directive, LA County BoS motion, inclusion in Governor Newsom's Legacy Report, and a balanced state budget across 2026-27/2027-28 2026-09-23 half year, 2026-04-08 FY25. Two additional US states now live (NJ renewed, Michigan £0.5m contribution in H1 2026), reducing single-state dependency at the margin.
2. Cash-rich SaaS-like economics at ~0.7x EV/ARR. ARR £62.9m, 100% recurring, 74% gross margin, £23.1m net cash + $9.5m undrawn facility; H1 2026 EBITDA doubled to £5.3m as marketing normalised, PAT positive £2.0m 2026-09-23 half year. On any standard SaaS multiple this is materially cheap.
3. Optionality on UK Soluna rollout and DWP/NEET expansion. UK Soluna soft-launched Sept 2026, DWP NEET contracts secured in West Midlands/S. Yorks/Cambridgeshire, and the alliance model is targeting counties/school districts/Medicaid plans — all incremental and unpriced 2026-09-23 half year, 2026-01-28 trading update.

Key risks

1. Extreme customer concentration. One customer (California DHCS) = 71% of group revenue in 2025 vs 73% in 2024 2026-04-08 FY25, note 4. Contract is in year 4 of a 4-year term; renewal is not disclosed as secured. A non-renewal or material re-scoping would remove ~£40m+ of annualised revenue and force aggressive restructuring.
2. Revenue declining, not growing. FY25 revenue -5.1% YoY (2.7% cc), H1 2026 -3.9% (-2% cc), ARR flat on cc basis, NRR 96% on cc 2026-04-08 FY25, 2026-09-23 half year. The "AI/US growth" narrative is not currently visible in the P&L; growth has stalled.
3. FX exposure. ~73% of revenue USD-denominated vs ~51% of costs; H1 2026 saw £0.7m FX drag on revenue and management flagged further H2 translation headwinds 2026-09-23 half year, CFO review. Not a fundamental issue but distorts reported numbers.

Operating leverage

Kooth has a genuinely leveraged model but not a pure-software one. Cost of sales is dominated by practitioner labour (£4.5m H1 2026) and direct user marketing (£3.5m H1 2026, down from £7.2m H1 2025 when California engagement was accelerated), with 249 practitioner FTEs at H1 2026 2026-09-23, note 9. Administrative expenses are largely fixed: £13.2m employee costs, £3.0m D&A, £1.3m IT/software, £1.9m professional fees per half — call it £20m fixed annual overhead. Gross margin has swung from 62.8% (H1 2025, heavy Cali marketing) to 74.1% (H1 2026, normalised) to 82.4% (H1 2024, pre-scale marketing) — showing the model can produce 80%+ incremental gross margin on any revenue above current run-rate that doesn't require proportional user-acquisition spend. A 15% revenue beat (£9m) at 75% incremental GM would drop ~£6-7m to operating profit, roughly doubling EBITDA — so leverage is real. However, unlike pure SaaS, some incremental state contracts do carry launch marketing costs (as in California), which caps the leverage vs. a network-effect platform.

Value-trap signals

• Single-customer concentration at 71% of revenue is the classic value-trap flag — the market is discounting binary renewal risk on a US state contract in an election-adjacent year.
• Growth has already turned — declining revenue two half-years running is not typical of a story growth stock; the P/E on 2025 EPS of 7p is ~26x, so the "cheap on multiples" case rests on EBITDA/ARR, not earnings.
• Heavy capitalisation of development costs (£4.4m in 2025, £6.2m amortisation) inflates EBITDA vs. cash reality; free cash flow was £1.2m in 2025 vs. £11.3m Adj. EBITDA.
• Otherwise, no going-concern issues, no dividend cuts, no material related-party red flags beyond disclosed ScaleUp Capital monitoring fees.

Earnings vs. expectations

Across the period the pattern is: beats in periods of hyper-growth (2024 through Jan-2025 trading update, where FY25 EBITDA came ahead of £9.5m consensus at £11.3m), one clear miss on revenue (FY25 revenue £63.3m vs. consensus £64.8m, driven by FX/Michigan timing), and back to in-line in H1 2026 (revenue £30.8m matched July trading update exactly; EBITDA £5.3m at top of £5.0-5.4m guidance) 2026-01-28, 2026-07-29, 2026-09-23. Management has been reasonably candid about the drivers (FX, deliberate marketing tapering) and the FY26 guide is "underlying results broadly in line with expectations before FX." Overall: mostly meets guidance, one revenue miss with disclosed causes, no chronic pattern of misses.

Conviction

3 — moderate.

• Anchors: clean audited financials, multiple valuation approaches (EV/ARR, EV/EBITDA, EBITDA-multiple DCF) all landing in a similar 220-330p corridor; the business is unambiguously profitable and cash-generative on the current cost base; balance sheet leaves plenty of margin for error.
• Caveats: the fair value is highly sensitive to a single binary event (California DHCS renewal), and I have no direct disclosure on likelihood or timing; the AI-beneficiary angle is largely marketing-adjacent (proprietary dataset is a real asset, but AI is not yet a distinct revenue line).