Kooth (LON:KOO): Leveraging High ROE and Strategic Expansion for Long-Term Growth

Kooth (LON:KOO), a leading digital mental health platform for youth, is positioned at an inflection point. With a 27% Return on Equity (ROE) driving earnings growth of 74% over five years, the company's capital efficiency and strategic U.S. expansion are key to unlocking long-term value. While near-term risks, such as U.K. NHS funding delays and margin pressures, weigh on sentiment, the stock's 44% discount to intrinsic value makes it a compelling play on the global mental health crisis.

ROE: The Engine of Capital Efficiency

Kooth's 27% ROE (vs. a 6.5% sector average) highlights its ability to generate profits without heavy capital expenditure. This efficiency stems from its recurring revenue model, where 70% of Annual Recurring Revenue (ARR) comes from the U.S. market, driven by contracts like California's universal youth access program.

The company's £14.9m net cash position (H1 2024) and no debt further underscore financial resilience. This capital light model allows Kooth to reinvest in growth while maintaining strong margins. For example, its Adjusted EBITDA improved from £0m to £15.8m in 2024, a 598% surge, reflecting operational leverage as scale is achieved.

Strategic U.S. Expansion: The Growth Catalyst

Kooth's U.S. expansion is the primary driver of its £66.7m revenue in 2024 (up 100% YoY). Key highlights include:
- California: 75,000 youth enrolled by February 2025, with quadruple the daily usage rate in Q1 2025 compared to 2024.
- Medicaid Partnerships: Aetna Better Health's Illinois pilot and New Jersey's new contract open access to 40 million Medicaid-covered children, creating a scalable revenue pipeline.
- Soluna Platform: Video coaching and care navigation features have boosted engagement, with plans to replicate the U.S. model in the U.K. by Q2 2025.

The U.S. market's £48.7m ARR (73% of total) and 75%+ net revenue retention validate the demand for scalable digital mental health solutions. Management's share option incentives (covering 5% of shares) further align leadership with shareholder interests, reducing agency risks.

U.K. Challenges vs. Long-Term Opportunities

While U.K. revenue dipped 6% in 2024 due to NHS funding cuts, Kooth remains the NHS's largest youth mental health provider, retaining key contracts like Cornwall and Isle of Man. The UK Soluna rollout (Q2 2025) aims to address declining U.K. margins by boosting engagement and diversifying funding streams (e.g., education and workplace partnerships).

Near-term risks include:
- NHS delays: New contracts may take time amid budget constraints.
- Margin contraction: EBITDA margins are expected to normalize to mid-teens in 2025 due to increased practitioner investments.
- Currency headwinds: A stronger pound could reduce U.S. revenue translation.

However, these risks are mitigated by Kooth's £21.8m net cash (2024) and its $9.5m undrawn credit facility, providing flexibility to navigate headwinds.

Valuation: A 44% Discount to Intrinsic Value

Despite its growth trajectory, Kooth trades at a 44% discount to intrinsic value, based on discounted cash flow (DCF) models using 15% growth and a 10% discount rate. Key valuation drivers:
- ARR growth: U.S. Medicaid partnerships could push ARR to £100m+ by 2026.
- Soluna scalability: The platform's modular design allows cross-border replication.
- Margin resilience: Gross margins remain stable at 82%, despite EBITDA normalization.

Investment Thesis

Bull Case: U.S. Medicaid contracts expand to 15+ states, and Soluna's U.K. rollout boosts margins. Revenue hits £100m by 2026, driving a 50%+ stock price upside.
Bear Case: NHS funding delays persist, and U.S. expansion slows. However, Kooth's cash reserves and recurring revenue model limit downside risks.

Actionable Takeaway:
Kooth's 27% ROE, U.S. growth, and undervalued stock make it a high-conviction buy at current levels. Investors should focus on catalysts like:
- Q2 2025 Soluna U.K. launch.
- Medicaid contract wins in 2025–2026.
- Margin stabilization post-2025 investments.

For a portfolio seeking exposure to secular mental health trends, Kooth offers a rare combination of capital efficiency, scalability, and valuation upside. The near-term noise fades against its long-term potential.

Disclaimer: This analysis is for informational purposes only. Investors should conduct their own research before making decisions.