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MyFiziq (ASX: MYQ) – Health & Fitness vertical presents near-term growth opportunity

In good shape Share Price: A$0.26

MyFiziq (ASX: MYQ), a Perth-based technology and service company, offers a patented technology that allows users to track their body shape and dimensions while performing everyday activities. The growing adoption of smartphone apps and mHealth across varied verticals is driving the use of this technology. Currently, MyFiziq targets four verticals. Health & fitness, as well as medical & insurance sectors, are key nearterm opportunities. Corporate wellness and the apparel market are likely to create long-term growth opportunities.

 


Investment case

By the end of 2018, two-thirds of adults across the globe are expected to own smartphones and are likely to account for 73% of internet consumption. This trend is expected to have a strong impact on the adoption of MyFiziq technology. The growth potential of all the business segments that MyFiziq targets is immensely high. Moreover, the adoption of apps that allow tracking of body shapes and dimensions is on the rise across these segments. We believe that MyFiziq’s strategy to focus on these verticals is the best way to realise its potential.

Valuation range of A$0.91–1.08 per share

We value the company using DCF approach between A$0.91- 1.08 per share based on base case and optimistic case assumptions, respectively. MyFiziq will derive revenue from Licencing & Development (L&D) fees and subscription revenue targeting B2B client channels. We have followed a conservative approach in assuming number of B2B clients signed during the fiscal year and consumer base per B2B client, across four verticals. There could be a potential upside in revenue subject to MyFiziq finalisation of the WeChat transaction currently underway and the immense potential of the China market, which is not accounted for in forecasts due to limited clarity on the deal progress.

Introducing MyFiziq Limited (ASX: MYQ)

MyFiziq, a Perth-based technology and services company, has developed a revolutionary body-shape-tracking technology that is embedded in a partner’s app to enable the app users to track body shape, total body fat and dimensional changes while they perform routine activities or supply this data to their insurers or make more informed choices when buying apparel on line. The technology uses images captured using a smartphone to create a representation of an individual in the form of a 3D avatar with accurate circumference measurements. MyFiziq offers a suite of Software Development Kits (SDKs) and white-label app’s to B2B partners in various industry verticals, including health & fitness, medical & insurance, corporate wellness and apparel. Partners either embed the company’s SDKs into new or existing apps or utilise one of the MyFiziq white-label offerings to customise the experience to suit their branding requirements. The combined offering is then made available to the partners’ end-users for a per-avatar, per-user / per-month subscription fee, or a percentage of the gross sale price depending on the vertical and unique partner requirements.

Besides commercialising its technology, MyFiziq also focuses on its cofounder’s brand, Dr Katherine, which provides a variety of science and education-based wellness products including a 20h body confidence online program, sold-out workshops, inspirational talks, private consulting and published works. The Dr Katherine focus on the mindset of individual complements MyFiziq’s physical focus and contributes to the overall growth of the company.

How has MyFiziq evolved through inception?

MyFiziq’s business model has evolved from B2C to B2B2C since its inception. In the initial years, MyFiziq primarily focussed on developing a technology that will allow individuals to track their body measurements while they participated in diet or workout sessions to change their physical appearance. To make its technology ready for commercial launch, it conducted several validation studies along with healthcare organisations and universities in 2016. In parallel, it launched an initial free version of the MyFiziq app through the iOS App Store to get customer feedback and refine its algorithms and machine-learning models. In late FY2017, the company developed a suite of SDKs that could be integrated into partner apps. It started off by targeting businesses in four different segments – health & fitness, medical & insurance, corporate wellness and apparel – with a high-unmet need for apps that can track an individual’s overall health & fitness by measuring anthropometrical changes. To increase the app’s traction in the market, the company is also making conscious efforts to market its technology by entering commercial agreements with known sporting identities, health & fitness personalities as brand ambassadors and releasing videos highlighting the use case of its technology. The focus on marketing efforts is expected to generate awareness about the potential of MyFiziq technology and pace up its adoption across verticals.

Meanwhile, the company has also strengthened its IP position across numerous geographies. MyFiziq has been awarded full patent status across countries such as Australia, the USA, Singapore, Korea and Japan. It is also accelerating patenting across other regions, including Canada, China, Europe, India, Japan and New Zealand.

How is MyFiziq positioning its technology across its customer verticals?

MyFiziq is positioning its technology to augment the features of its partner apps by offering their customers the ability to capture and track real-time body-shape, measurements and total body fat. The company opens new markets for partners, allowing for secure collection and comparison of measurements for clothing, weight management, nutrition and athletic goals and tracking of chronic illnesses such as diabetes, coronary heart disease and mortality.

Health & Fitness: Organisations such as sport and exercise brands, companies that offer online digital training, apps and devices, or gyms and personal trainers can integrate MyFiziq technology into their pre-existing offerings to allow customers to track body shape and dimensions while they follow nutrition plans, and perform routine training, exercise or workout sessions. The privacy and ease of use for the individual removes many barriers and replaces conventional equipment such as scales which only report mass changes and not the more sought-after understanding of change in the user’s dimensions and physical appearance.

Medical & Insurance: Insurers and medical practitioners can use the MyFiziq technology to improve the monitoring of their patients or policy holders when assessing risk, underwriting insurance cover and perform dynamic premium adjustments by assessing policyholder’s actual and predicted future health risk through regular tracking of the total body fat percentage and body circumferences. The ability to privately gather and report a user’s physical condition when utilizing the technology has never been available outside of a doctor’s office without expensive procedures and equipment. The technology is ideal for early detection of change, allowing early intervention and greater customer care.

Corporate Wellness: MyFiziq offers its body-shape-tracking technology to corporate wellness platform providers to allow their clientele to increase employees’ productivity and engage them in physical activities for better health outcomes and reduced sick leave days. The corporate wellness market is a multibillion-dollar market which is growing rapidly with the increased loss of productivity in the work place due to illness and overall bad health. The US market is an ideal example of this growth where the employer pays for the health insurance of its employee’s. The MyFiziq technology is well placed for acceptance in this market as it allows the employer and the employee to engage in a gamified environment when working towards a better health outcome for both the individual and the ROI for the employer.

Apparel: MyFiziq aims to offer a simpler suite of SDKs to online retailers to enable them to fit and design customised solutions and allow their customers to choose the correct clothing size while making online purchases. The technology allows accurate measurements of an individual to the required locations according to the apparel company specific sizing chart and measurement protocols, as the manner in which a brand cuts and sizes an individual garment is almost always different to their competitors. In the same way companies supply their sizing chart online for a consumer, MyFiziq custom codes its technology to meet the companies sizing parameters. Also, important to note is the MyFiziq technology captures the individuals shape as well as required measurements allowing for a more precise and individualized fit. With online returns reported to be as high as 40%, a lot of which ends up in landfill, the adoption of this technology can reflect heavily in the apparel companies P & L.

What is MyFiziq’s business model?

MyFiziq primarily operates through a B2B2C model by collaborating with businesses that require tracking of body dimensions, shape or total body fat levels of customers. It generally earns revenues in the form of development and licencing fees, as well as and subscription fees 1 paid by its partners. Partner companies can embed MyFiziq technology in various ways such that
it complements their existing environment. MyFiziq can either augment existing branding or deliver a fully bespoke version with customised measurements and engagements. The entire range of services offered by the company includes the following (Figure 1):

Partner Build: MyFiziq provides the required SDK components, documentation and support to the partner; however, the partner is responsible for the development of the app and implementation of the MyFiziq SDKs.

Bespoke Build: Both the partner and the company perform customised development. Both partner and MyFiziq design and scope the full architecture of the app. In this case MyFiziq is paid by the partner for both technical input and development work.

MyFiziq Build: The partner pays MyFiziq to develop and design the application in order to integrate MyFiziq SDKs into its existing app.

White-label Build: MyFiziq performs re-branding of the pre-existing whitelabel app. In this case MyFiziq is paid by the partner for both technical input and development work.

MyFiziq offers different pricing structures based on the type of customer vertical. For the health & fitness vertical, the company charges a base cost of US$4.99 per user, per month on a 12-month subscription to provide partner app users with the ability to measure and track dimensional changes as a direct result of the nutrition, training, and coaching partners provide. The pricing is based
on a volume user model where the pricing is reduced on a per user/per month basis when certain pre agreed volume levels are met.

For the medical & insurance vertical, the company charges a base cost of US$4.99 per policy, per month. It allows insurers to assess, and predict health outcomes by collecting anthropometrical data and body fat (as an indicator of health status) of policyholders. The pricing is based on a volume user model where the pricing is reduced on a per month basis when certain pre agreed volume levels are met.

For the corporate wellness vertical, the company charges a base cost of US$4.99 per employee per month. It provides employees interventions and reward-based activity in the workplace while increasing productivity. The pricing is based on a volume user model where the pricing is reduced on a per month basis when certain pre agreed volume levels are met. For the apparel vertical, the company charges 5% of the gross sale price per garment and a licence fee for the SDKs. It provides retailers the ability to offer online or in-store accurate body measurements to their consumers, so that they can order and fit the correct garment size. The pricing is based on 5% of the gross sales up to 5m individual units. 4% per sale up to the next 5m units and 3% per sale on sales above 10m units.

What makes MyFiziq technology unique?

MyFiziq’s platform is a revolutionary technology that uses computer vision, machine-learning and patented algorithms to generate insights related to body measurements such as body fat, shape and dimensions. It processes images collected using smartphones and any other mobile digital device on a secure, enterprise-level infrastructure. The technology not only provides a simpler way to track body measurements but also removes the margin of human error associated with the traditional way of taking measurements using tools such as measuring tapes. It accurately measures anthropometrical changes through a consumer’s mobile device, and allows individuals, insurers, medical practitioners or employers to keep track of their body measurements while they perform routine activities or wish to track their anthropometric data over time. We believe that this is a disruptive technology as very few players can offer something as accurate and competitive. In fact, in one of the validation studies conducted by Professor Tim Ackland from the University of Western Australia, the average accuracy of the MyFiziq technology was reported as 97.5% across the four circumference measures – chest, waist, hips and thighs – making it an important tool for individuals or organisations looking too track body changes over a period.

Ten reasons to consider MyFiziq (ASX: MYQ)

1) MyFiziq technology has a ‘blue sky’ of applications. MyFiziq is initially focussing on four key industries that require anthropometric tools, including health & fitness apps, medical & insurance, corporate wellness and apparel. All these industries are touted to have immense future growth potential. Moreover, the technology’s use can be expanded to many other industries that require tracking of fitness/body shape.

2) Conventional ways of taking body measurements are outdated and need serious replacement options. MyFiziq technology is easy to use, accurate and more convenient than the traditionally used products such as scales, tapes and body scanners. Which can be expensive, hard to access and unable to be done by the end user in the privacy of their own
home.

3) The accuracy results are extremely promising. The company, along with researchers from the University of Western Australia, has shown that the technology, in pre-production formats can measure dimensions of the human body with an average accuracy of 97.5% and body fat with an accuracy of 89%.

4) The number of smartphone and wearable device users is expected to continue to rise. By the end of 2018, two-thirds of adults across the globe are expected to own smartphones and are likely to account for 73% of internet consumption. This trend is expected to have a strong impact on the adoption of MyFiziq technology.

5) There is significant demand for mobile health apps. Currently, there is a high demand for mobile health apps owing to the benefits and privacy it provides to both healthcare providers as well as patients. According to a 2018 survey by Accenture, nearly half (48%) of healthcare consumers are using mHealth apps now, compared to just 16% in 2014. This bodes well for apps that track overall fitness and health of a consumer.

6) MyFiziq has a potential for rapid uptake in the health & fitness segment. It has already signed binding term sheets with fitness app developers, renowned trainers and fitness device companies to capture their user base. With the commercialisation of integrated apps, we believe MyFiziq has a significant near-term growth opportunity.

7) The technology has a potential to replace the BMI calculation traditionally used by insurers to measure policyholders’ health. A study conducted by researchers from UCLA and UC Santa Barbara found that the BMI calculation is not reliable for classifying someone’s health status. MyFiziq app’s ability to identify the relationship between body fat and chronic disease markers makes it an ideal tool to track policyholders’ health. Therefore, it has a potential to replace the BMI calculation in future.

8) Corporates in industries that are at higher risk of human capital are likely to adopt MyFiziq technology. These industries include aviation, insurance, logistics and transport to mention a few. They are likely to adopt wellness platforms, along with the MyFiziq technology, to mitigate this risk by providing a platform that will allow employees to work on improving health, engagement and productivity at their workplaces, furthermore by overlaying data sets such as incident and fatigue data, in conjunction with wearable information such as heart rate and sleep,
MyFiziq data can be used to aid in preventing incidents by identifying at risk individuals due to their weight, measurements and overall total body fat.

9) There is a significant opportunity for the use of technology in the apparel industry. Garment returns due to incorrect size are increasing the cost burden on retailers and manufacturers. Additionally, much of incorrect size returns are sent to landfill. Therefore, in order to cut down return costs, and reduce environmental impacts of wrong size returns, companies are actively looking for technologies that allow their consumers to purchase clothes based on their body dimensions. We believe that MyFiziq technology can fulfil this need.

10) We believe MyFiziq is currently undervalued. We value the company using DCF approach between A$0.91-1.08 per share based on base case and optimistic case assumptions, respectively. MyFiziq will derive revenue from Licencing & Development (L&D) fees and subscription revenue targeting B2B client channels. We have followed a conservative approach in assuming number of B2B clients signed during the fiscal year and consumer base per B2B client, across four verticals. There could be a potential upside in revenue subject to MyFiziq finalisation of the WeChat transaction currently underway and the immense potential of the China market, which is not accounted for in forecasts due to limited clarity on the deal progress.

11) In an ‘I want it here and now’society. In a world of immediate access and convenience, MyFiziq has positioned itself in a mobile phone and therefore in the palm of the impatient consumers hands.

Valuation

In the following section we attempt an initial valuation range for MyFiziq. Please note that the assumptions and end valuation pertained in this report are those of Pitt Street Research. The assumptions have been modelled from the information we have gathered from the company’s announcements and the general market. MyFiziq has not played a role in the parameters Pitt Street have used nor has it supplied any financial information used to conclude the valuation.

We value MyFiziq based on a Discounted Cash Flow (DCF) model and have arrived at two intrinsic values of A$0.91 and A$1.08, based on base case and optimistic case (bull case) assumptions, respectively.

To value MyFiziq we made certain assumptions about growth in usage, but for conservatism’s sake we only valued two income streams – subscription and licence & development income. We valued the revenue streams out to FY25 and then extended the DCF model by growing revenue at a modest 5%- 7% p.a. to FY29 while maintaining EBIT margins at ~30%.

A diffusion-based model for subscriptions:

The company has already signed five clients or B2B partnerships (Fitocracy, Mayweather Boxing + Fitness, Conor McGregor – Fast, Evolt, WellteQ). We generated user models based on these five clients out to 2025 and assumed, as per company disclosures, that initial usage across this client base would be in the order of 1.3 million users by the end of 2020, growing to 2.4 million users by 2025. We assume 1.3 million represents the ‘Innovators’ and ‘Early Adopters’ across the client base but that by 2025 the MyFiziq app has mainstreamed into ‘Early Majority’ class of user. That this approach is reasonable is suggested by the speed with which fitness-type apps have diffused across comparable target audiences over the last seven or eight years.

Our pricing model used for MyFiziq’s key customer vertical of health & fitness assumes a declining charge rate with increasing volume as per the slabs shown below.

• 0 – 100,000 active users – A$2.99 per month per user
• 100,001 – 250,000 active users – A$2.50 per month per user
• 250,001 – 500,000 active users – A$1.99 per month per user
• 500,001 – 1,000,000 active users – A$1.50 per month per user

We have not included the WeChat partnership in our forecast due to availability of limited information on the progress on the deal execution, which could also be a potential catalyst in the company’s future revenue growth.

L&D revenue: Another source of revenue for MyFiziq will be L&D income based on the agreement and nature of services offered. We have assumed both average licence income per firm and average development income per firm as A$1m. We have assumed a steady increase in the number of new firms signing up to use MyFiziq services/applications from 1 in FY19 to 5 in FY25.

The L&D revenue is expected to contribute ~11% to the total revenue over FY20-25.

Operating costs: MyFiziq is expected to achieve breakeven at 153,000 active users, which is ~15% of 1 million users. We have assumed a linear growth progression in costs with operating cost constituting ~70% of sales.

Discount rate and terminal value: We considered MyFiziq as a high-risk company and applied a market risk premium of 9.5%, which resulted in a WACC of 12.1%. We used a conservative 0.5% terminal growth rate in the DCF model.

The resulting DCF valuations and sensitivities have been summarised in Figure 5 and Figure 6, respectively. Our base case and optimistic scenario have yielded a value per share of A$0.91 and A$1.08, respectively, with a mid-point of A$0.99 per share.


Re-rating MyFiziq

We see a number of factors contributing to a re-rating of MyFiziq towards our valuation range:

• The ability of the company to attract more B2B clients within the health & fitness, corporate wellness and insurance segments.
• The ability of company to be able to penetrate a larger user base of its current clients with continuous technology upgrades.
• The capability of the company to commercialise a SDK offering / white-label app for the apparel market.
• The potential of MyFiziq technology to be expanded into areas other than the ones the company is already targeting.



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