2023 was a pretty good year for shareholders of Kneat (Kneat Stock Quote, Chart, News, Analysts, Financials TSX:KSI) but 2024 could be even better.
So says Echelon Capital Markets analyst Robb Goff, who in an update to clients January 9, reiterated his “Speculative Buy” rating and price target of $4.20 on KSI, implying a return of 40 per cent at the time of publication.
The analyst explained why he regards the stock as a “Top Pick” for 2024.
“KSI’s contract momentum with eight wins in 2023 together with its SaaS revenue growth at 70% y/y warrants its return to the Top Picks Portfolio in Q124. In our view, the SaaS Revenue Line Tells it All – SaaS revenues have advanced from $8.7M in 2021 to $17.3M in 2022 with 2023 on track to meet or exceed our $29.5M forecast. Outperformance together with announced wins give support to our SaaS revenues reaching levels of $43.1M in 2024, $57.8M in 2025, and $76.8M in 2026. With SaaS revenues at 92% of revenues and pushing ahead, we look for continued margin expansion to be part of our positive revaluation thesis. KSI’s €15M secured debt financing provides access to funds for its aggressive R&D development spending and continued growth. The debt will be used to fund the FCF drain of $11.56M for H223 ($22.3M for 2023) and $17.2M for 2024 as KSI invests in capitalized R&D expenditures of $15.6M/$17.7M for 2023/24.”
Goff thinks KSI will post an EBITDA loss of $3.2-million on revenue of $34.0-million in fiscal 2023. He expects those numbers will improve to EBITDA of positive $2.2-million on a topline of $47.6-million the following year.
“We believe KSI represents an attractive investment valued at 5.1x/3.9x 2024/25 EV/revenues and 7.5x/5.6x EV/Gross Profits in the context of larger, slower growth peers Veeva Systems (VEEV-US, NR) at 9.8x EV/2024 revenues and 13.1x EV/2024 Gross Profits, and Aspen Technology, Inc. (AZPN-US, NR) at 11.1x EV/2024 revenues and 13.3x EV/2024 Gross Profits,” the analyst concluded. “We see KSI shares continuing to command a premium to their Canadian peers given the strength of the Company’s land-and-expand profile and attractiveness as a mid-to longer-term takeout where its marquee client sponsorship and accumulated R&D are likely to warrant a premium. Canadian Software and SaaS Survey averages are 5.2x and 6.3x for EV/2024 revenues and 7.6x and 8.5x for 2023 EV/2024 Gross Profits, respectively. We see aggressive returns against the execution of our forecasts. Our SaaS Survey of 31 companies, trading at 2024 revenue growth of 20%+, is valued at 8.6x EV/2024 revenues, 11.8x EV/2024 Gross Profits, and 32.8x EV/2024 EBITDA. We continue to see KSI as an attractive takeover candidate by a larger competitor such as Veeva or Aspen.”
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