Identitii (ASX:ID8) has commercially launched its solution to the banking industry’s multi-billion dollar problem of how to manage and communicate the increasing amounts of information required to protect against fraud, money laundering and terrorist financing before a commercial transaction can be cleared and settled. Delays in settlement, because of missing information, are frequent, expensive to address and add to business debt and liquidity issues.
Identitii’s Overlay+ platform employs blockchain technology to deliver a cost-effective solution to banks, who face, and are incurring, enormous non-compliance fines, and has the potential to greatly improve the speed and efficiency of the entire purchasing and delivery value chain for businesses thereby lowering costs and improving liquidity.
Identitii’s development partner and launch client is HSBC who will be rolling the platform out through its Asian operations. A number of contracts with other banks are expected before the end of calendar 2019 with sales momentum building through 2020. As the volume of transactions processed builds over the next few years, revenue is expected to grow rapidly with a potential breakthrough into profitability during FY 2022.
Whilst additional capital will be required, with an enterprise value of around $17 million, the market seems to be heavily discounting commercialisation risk. Accordingly, we believe that there is considerable valuation upside with contract wins, and in due course transaction volumes processed, being the key valuation triggers.
- Banks cannot easily meet demands to “Know Your Transaction” with existing legacy systems: Greater regulatory oversight of bank behaviour, global efforts to stamp out fraud and money laundering, changes in SWIFT protocols for handling messages and the emergence of open banking are putting enormous pressure on banks to gather, store and communicate more and more information regarding each transaction for which their existing systems were not designed.
- Identitii is an early mover with a solution incorporating blockchain technology and tokenisation: Identitii’s innovative platform, Overlay+, is built on blockchain technology and uses TokenIDs, unique cryptographic identifiers, over which it has a patent pending, to provide permissioned, secure access to the required information and to provide an audit trail of all activity.
- Opportunity to be one of the leading suppliers: There are over 11,000 banks in the SWIFT system, which manages protocols for the transmission of messages which accompany cross-border transactions, and over 25,000 banks globally including domestic only and those outside the SWIFT system. This is a large market opportunity where no solution has yet established any significant position. Accordingly, the challenge is to quickly build market acceptance and penetration.
- HSBC is the launch client: HSBC, one of the worlds’ top 10 banks, has been working with Identitii from concept stage and has launched a Digital Accounts Receivable Tool it calls DART, which was built using Identitii’s tokenisation technology, with its commercial customers in India. The platform will be introduced to other key Asian markets over the next two years.
- Large pipeline of interest already established: Identitii has a growing pipeline of banks, corporates and other related institutions at various stages of engagement. Identitii will not announce details of proof of concept or similar engagements and will only announce fully executed licence based contracts.
- The revenue model will deliver multiple revenue streams: The revenue model is similar to traditional enterprise models where revenue is generated from customisation, configuration and training on start-up, annual site licence, annual maintenance and support, and from volume related transaction activity.
- Transaction volumes will be the powerful long-term value driver: Every call to the permissioned blockchain utilising the Overlay+ token generates a transaction fee. Volumes are difficult at this early stage to estimate but could over time cumulatively reach 100 million, generating revenue of a few cents each, within two or three years and then quickly grow to over 500 million as the number of bank clients and their business customers increase.
- Scaling up in FY 2020 with traction building in FY 2021: A number of signings are expected before the end of calendar 2019 to come on stream during 2020. Revenue traction is expected in FY 2021 as these and subsequent clients go live. A partnering program is being put in place to drive sales and marketing, provide outsourced configuration and installation services and to expand the functionality of the platform which will form key elements in the company’s go to market strategy.
- Breakthrough to profitability expected during FY 2022: We expect Identitii to secure between 7 and 10 clients over the next two years which will enable it to potentially breakthrough to profitability early in FY 2022.
- Future capital needs: $11 million was raised through the IPO in October 2018 which enabled the company to achieve commercial launch with HSBC and to expand its infrastructure to support its market entry. Additional capital will probably be required during the next year to support business development through to an expected positive cash generating position in late calendar 2021.
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Please note that Gordon Capital has been retained by Identitii Limited to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report.
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