Kooth plc (LON:KOO): High ROE, Strong Growth—Is This Undervalued Dip a Buy?

Kooth plc (LON:KOO), a digital mental health platform, is trading at a 44% discount to its intrinsic value according to a DCF analysis, despite boasting a 27% return on equity (ROE)—nearly four times the healthcare sector's average of 7.5%. The stock has slumped 22% over the past six months, driven by analyst warnings of a potential earnings decline. But is this pullback a buying opportunity, or a warning sign of deeper troubles?

Let's dissect the data.

The ROE Advantage: A Fortress of Profitability

Kooth's ROE of 27% stands out in a healthcare sector where even top firms like pharmaceutical companies rarely exceed 10-12% (as seen in global health sector data). This metric highlights Kooth's operational efficiency: it generates nearly 27 cents in profit for every £1 of shareholder equity. By contrast, the broader sector's ROE struggles due to high fixed costs and regulatory headwinds.

The disparity is even starker when comparing growth: Kooth's 74% earnings growth in 2024 crushed the healthcare industry's 15.9% average, as detailed in analyst forecasts. This strength stems from its U.S. expansion, where 70% of its £60M ARR now originates, and its Soluna platform, which offers video coaching and care navigation.

DCF Analysis: A 44% Discount, But Risks Lurk

The DCF model estimates Kooth's intrinsic value at £2.34 per share, implying a 44% undervaluation. However, this relies on assumptions that may be overly optimistic. The model assumes a terminal growth rate of 2.3% (tied to UK bond yields) and declining FCF from £29M in 2025 to £4.1M by 2034. Analysts, meanwhile, project earnings will shrink by -24.1% annually through 2027, citing NHS funding constraints and operational headwinds.

The disconnect between the DCF and analyst consensus (which lowered price targets to £4.73 in early 2025) raises a red flag. If earnings do decline, Kooth's valuation could face further pressure.

The Near-Term Risks: Earnings Slump and NHS Dependence

• Earnings Decline Forecast: Analysts predict a stark reversal—Kooth's EPS is set to drop -30% annually over three years, contrasting with its recent 74% growth. This reflects concerns over NHS budget squeezes and competition in the U.S. market.
• Share Price Volatility: The stock has swung wildly, rising 15% in April 2025 but falling 16% in October /2024. The current dip to £1.32 may reflect skepticism about its ability to sustain growth.
• Market Cap Limitations: Its small market cap (£100M) could amplify volatility, as institutional investors may avoid it due to liquidity concerns.

Why the Dip Could Be a Buying Opportunity

Despite the risks, three factors tilt the scales toward a long-term buy:
1. Strong Cash Position: With £21.8M net cash in 2025, Kooth has the liquidity to weather near-term headwinds. No debt means no refinancing risks.
2. Strategic Leverage: Its U.S. expansion (now 70% of ARR) and Soluna platform rollout in the UK (Q2 2025) could reignite growth. The NHS remains its anchor, but advocacy efforts aim to secure policy support, easing funding risks.
3. DCF's Intrinsic Value Buffer: Even if earnings shrink, the £2.34 DCF valuation leaves room for error. A conservative estimate of £1.80 still implies upside from current levels.

Investment Thesis: Buy the Dip, But Mind the Timeline

The stock's 22% drop presents an entry point for investors willing to look past short-term headwinds. Kooth's high ROE and cash reserves suggest it can navigate near-term earnings declines while executing its growth plan. However, patience is key:

• Hold for 1–2 years: Analysts' earnings forecasts will likely moderate if Kooth's U.S. expansion and Soluna rollout deliver results.
• Monitor NHS Contracts: Renewals in California, Illinois, and Pennsylvania are critical to sustaining ARR growth.
• Watch for Buybacks: The 10% equity buyback in 2024 signals management's confidence; future repurchases could lift sentiment.

The Bottom Line

Kooth's 27% ROE and £2.34 DCF valuation make its current price of £1.32 compelling—if investors believe management can reverse the earnings outlook. The risks are real, but the upside for a turnaround story in a growing mental health market is substantial. For those with a 2–3 year horizon, this dip could be a golden entry point.

Final Call: Hold for now, but consider accumulating on dips below £1.20. The true test comes in 2026, when the DCF's FCF projections and Soluna's UK rollout will reveal whether Kooth's fundamentals justify its valuation.