kneat.com has a 45 per cent upside, says Echelon

Investors should be aware of how kneat.com (kneat.com Stock Quote, Charts, News, Analysts, Financials TSX:KSI) keeps racking up the contract wins, says Echelon Capital Markets analyst Rob Goff. Goff delivered an update to clients on Thursday where he reiterated a “Speculative Buy” rating and $4.20 per share target price, saying he likes kneat’s organic growth potential.

Document management, compliance and validation software company kneat announced on Wednesday the signing of a three-year Master Services Agreement (MSA) with a division of a leading global pharmaceutical company, with implementation of kneat’s software expected in the fourth quarter 2023. Kneat said the pharma company is headquartered in Asia and employs over 10,000 people, with operations across all stages of pharmaceutical research. The initial contract will implement kneat’s platform for computer systems validation and equipment qualification at the company’s European manufacturing site.

“Through this phase we are also building the foundational layer for digitalization of many more use cases, ultimately helping our customer to improve the health of more people, the primary objective we all share,” said Eddie Ryan, kneat CEO, in a press release.

Goff said the announcement marks kneat’s fifth MSA win in the past six months and its 15th MSA overall with Top 20 Global Healthcare Leaders.

“We maintain our bullish view toward the Company’s organic growth as it completes its transition to a SaaS model,” Goff wrote.

Goff said KSI represents an attractive investment, valued at 6.4x 2023 revenues and 9.5x EV/Gross Profits compared to its larger, slower growth peers including Veeva Systems at 12.4x and 17.1x, respectively, and Aspen Technology at 9.4x and 12.4x, respectively.

“We see KSI shares continuing to command a premium to their Canadian peers given the strength of its land-and-expand profile and attractiveness as a mid- to longer-term takeout,” he said.

Goff is projecting kneat’s revenue to go from $23.7 million in 2022 to $34.7 million in 2023 and to $48.1 million in 2024, while EBITDA is projected to go from negative $2.9 million in 2022 to negative $4.8 million in 2023 and to positive 1.2 million in 2024.

KSI has been in the $2.50-$3.00 per share range for the past year, while Goff’s $4.20 target represented at press time a projected one-year return of 45 per cent.

“KSI continues to highlight that full deployment across its current SaaS clients would support baseline revenues in excess of $50 million. We look for the $50 million benchmark to be increased reflecting new contract wins. We are optimistic that KSI will move to a target of $100 million in two years with the inclusion of adjacent markets where services are being developed,” Goff wrote.

“The Company puts its total addressable market at $700 million before allowing for adjacent markets where KSI has seen initial wins and where current R&D expenditures will broaden the Company’s service applications,” he said.