Kneat.com is a double, says Mackie Research

In an update to clients on Wednesday, Mackie Research analyst Nikhil Thadani says Kneat.com (Kneat.com Stock Quote, Chart, News TSXV:KSI) is still on track for a revenue inflection point over the second half of 2019, based on the company’s just-released quarterly results.

The analyst is maintaining his “Buy” rating and $2.50 target price, which represents a projected return of 104.9 per cent at the time of publication.

Kneat, which supplies a software platform for data and document management particularly for the life sciences industry including biotech, pharmaceutical and medical device companies, released its second quarter ended June 30, 2019, on Tuesday, featuring revenue of $529,000, a 299-per-cent increase year-over-year, with annualized recurring revenues as of June 30 increasing by 58 per cent to $1.1 million since the end of the previous quarter, with SaaS revenue driving the positive data.

Over the quarter, KSI saw two 2018 customers deploy its SaaS platform (four deployments year-to-date and two customer having begun scaling their on-premise deployed solutions). The company also said that it signed a new SaaS customer over the Q2, a leading company in the field of messenger RNA.

“We are pleased with progress across all areas of the business and in particular with the growth in annualized recurring revenues from our SaaS platform. As cloud solutions become more sought after in the life sciences industry, demand from our current and prospective customers for our SaaS platform remains strong,” said Eddie Ryan, CEO, in a press release.

Thadani noted that the top line of $529,000 beat out his $477,000 estimate as well as the consensus $516,000, while the company’s EBITDA loss of $991,000 was larger than his $813,000 estimate but better than the consensus loss of $1.2 million. He also noted that KSI ended the quarter with about $8 million in cash, the company’s strongest position in its history.

Thadani says that the pickup in annual recurring revenue is encouraging.

“KSI stock is relatively flat since the company’s investor update in June – not bad, considering recent market volatility,” writes Thadani. “At the same time, Q2 results and associated management commentary suggest the company’s H2/19 inflection appears to be on track – consistent with management’s June investor messaging. We believe KSI’s valuation provides room for upside as >$20 million Annual Recurring Revenue (ARR) comes into view.”

The analyst ended his note by reiterating his earlier claim that KSI could get a very positive catalyst if it was able to snag a contract with any of a number of likely major pharma companies (such as Eli Lilly, Glaxo SmithKine and Pfizer).

On a comparative basis, Thadani says that KSI trades on a 2020 basis at just under 7x Sales versus just under 9x Sales following its Q1 results, whereas US software and SaaS companies trade at about 9x 2020 Sales and Canadian companies trade at about 10x. His $2.50 per share target reflects a 7.5x 2022 revenue multiple discounted back three years, with upside from potential contract wins and contract win/revenue conversion.

Thadani has adjusted his estimates, now calling for Kneat.com to generate 2019 revenue of $3.0 million (previously $2.7 million) and EBITDA of negative $3.4 million (previously $3.1 million).