Kneat still has double-digit upside, Echelon says

Software company Kneat (Kneat Stock Quote, Chart, News TSXV:KSI) is still in the early innings of its story, according to Echelon Wealth Partners analyst Gianluca Tucci who issued a report on the company on December 11, reiterating his “Speculative Buy” recommendation and $3.00 target price.

Kneat, a Canadian company with operational headquarters in Limerick, Ireland, and marketing its data validation and SaaS-based platform Kneat Gx, announced on December 11 that it has signed a five-year master service agreement with a US-headquartered, major biopharmaceutical company, one with 10,000 employees and operations in over 30 countries.

The company will use the Kneat Gx platform to digitize its validation work processes with implementation said to begin immediately at its lead European manufacturing site.

“We are excited to be selected by this leading biopharma company and we look forward to working closely with their teams. Through the year we signed multiple new customers, highlighted by master agreements with four of the top twenty life sciences companies. At the same time our existing customers are beginning to scale by expanding their use of our software,” said Eddie Ryan, CEO of Kneat.

Assessing the event in his report, Tucci said that since the start of 2018 Kneat has signed a total of 12 customers, with many of the top 15 pharma companies worldwide as current customers.

“This is a significant contract win and we believe could represent a seven to eight figure ARR at-scale given the customers geographic presence,” wrote Tucci in his report. “Christmas has certainly come early for KSI and its shareholders have been rewarded throughout 2019 with the stock up 112 per cent year-to-date as it has been our top pick all throughout the year.”

Tucci said that even though revenues are likely to be lumpy while Kneat’s SaaS revenues continue to build up and offset its on-premise revenues, investors should expect continued news flow from Kneat with additional go-live and scaling events. The analyst said that the importance for real-time validation, visibility and integrity of systems and data — all covered by the Kneat Gx platform — “cannot be understated.”

“We expect continued momentum into 2020 as recently announced contracts go-live, evolve into revenue and consequentially turn into scaling revenue. We remain well entrenched in our bullish thesis as the Company continues to pave the way for data validation in the life sciences industry,” Tucci said.

By comparison, Tucci claims that KSI currently trades at a 12.7x multiple of his 2020 EV/sales estimates versus its Canadian and Global Software/SaaS comparables at an average of 6.4x and 7.5x, respectively, with peers Veeva and Aspen trading at 15.3x and 14.1x, respectively. Tucci says that KSI rightly commands the premium multiple due to its hypergrowth rate much above its peer group average.

Looking ahead, Tucci thinks Kneat will generate fiscal 2019 revenue and EBITDA of $3.96 million and negative $3.0 million, respectively, and fiscal 2020 revenue and EBITDA of $9.82 million and negative $0.9 million, respectively.

At press time, Tucci’s $3.00 per share target price represented a projected 12-month return of 44 per cent.