Kneat has a 56 per cent upside, says Echelon

Software stock kneat.com (kneat.com Stock Quote, Charts, News, Analysts, Financials TSX:KSI) has been floating along for the past year without much ground gained, but investors will want to own a piece of this company, says Echelon Capital Markets analyst Rob Goff, who sees strong growth potential in Kneat. 

Goff delivered an update to clients on Monday where he reiterated a “Speculative Buy” rating and $4.20 target price, good for a projected return of 56 per cent at the time of publication.

Kneat is a Canadian software firm with operations in Limerick, Ireland, with a SaaS platform for business work processes such as equipment to computer validation and quality document management.

The company announced last week the signing of a three-year Master Services Agreement (MSA) with a division of one of the 20 largest pharmaceutical companies in the world by revenue. The contract is for e-logbook management for the company’s quality control labs, where the pharma company specializes in rare disease therapies.

The MSA is for sites in the US and the EU and has a go-live date pinned at sometime in the present quarter.

“Today’s win is not just a beachhead in another of the world’s largest pharmas; it also demonstrates the appeal of Kneat’s applicability for use cases outside of validation and the importance of our partners,” said Kneat CEO Eddie Ryan in a press release. “Whether it’s e-logbooks in a lab, or the commissioning and qualification of new equipment on a factory floor, Kneat is a key digital transformation partner for life science.”

Goff commented that Kneat now has 13 MSAs with top-20 global healthcare leaders, which shows the broad appeal of KSI’s platform, now the go-to standard with companies, according to Goff. The analyst pointed out recent contract wins such as another three-year MSA announced in January and a three-year contract signed this past October with one of the world’s largest healthcare companies.

“We continue to look for KSI to update its longstanding, narrowly defined land-and-expand target revenue potential of $50 million to reflect both its success developing broader service capabilities and initial inroads with adjacent markets including healthcare supply-chain providers and consumer cosmetics,” he wrote.

Goff left his estimates as-is for the moment, calling for KSI to hit 2023 revenue and adjusted EBITDA of $34.0 million and negative $4.9 million, respectively, and for 2024 revenue and EBITDA of $47.9 million and $0.7 million, respectively.

Goff said he’s bullish on Kneat’s organic growth as the company completes its transition to a SaaS model.

“We believe KSI represents an attractive investment valued at as 6.7x 2023 revenues and 10.6x EV/Gross Profits in the context of larger, slower growth peers Veeva Systems at 11.4x revenues and 15.6x EV/Gross Profits, and Aspen Technology at 11.7x revenues and 15.5x EV/Gross Profits,” Goff wrote.