Blackline Safety is a misunderstood innovator, Ventum says

“A misunderstood innovator”.

That’s what Ventum Capital Markets analyst Amr Ezzat thinks about Blackline Safety (Blackline Safety Stock Quote, Chart, News, Analysts, Financials TSX:BLN).

In a research report to clients September 4, Ezzat resumed coverage (the analyst has a long history with the name, coverage of the stock was suspended during the merger of PI and Echelon to form Ventum Capital) with a “Buy” rating and price target of $6.50, implying a return of 41.3% at the time of publication.

The analyst listed the reasons he like the name, including what he described as a “relentless focus on product development”.

“BLN has consistently reinvested around 26% of its sales into product development since F2014, resulting in a differentiated product line and a three- to five-year technological lead over competitors,” Ezzat wrote. “This focus on innovation is central to the Company’s growth strategy. We project a top-line CAGR of 25.5% over our forecast period through best-in-class net dollar retention (130% last quarter), significantly outpacing industry growth rates. Blackline has emerged as one of Canada’s highest-growth tech companies over the past several years.”

Ezzat says he also likes BLNs expanding gross margins, proven leadership and strong balance sheet.

Regarding his label on BLN as a “misunderstood innovator” the analyst explained that this means opportunity for investors, as he sees a “valuation disconnect”.

“Despite a significant three- to five-year lead over competitors, the market underestimates BLN, primarily viewing it as a hardware provider to the oil and gas industry,” he argued. “In reality, ~75% of its business now comes from outside Canada (up from ~35% in F2015), with exposure to oil and gas reduced to 40% (from 55% in F2015). The Company’s products are highly configurable for multiple industries and applications, thus driving diversified, recurring revenue streams.”

Ezzat thinks BLN will post an Adjusted EBITDA loss of $5.8-million on revenue of $128.7-million in fiscal 2024. He expects those numbers will improve to EBITDA of positive $6.7-million on a topline of $163.3-million in fiscal 2025.

“We expect the Company to grow its sales nearly twofold by F2026 and become EBITDA breakeven by Q4/F24; as such, we believe using multiples on short-term estimates significantly (and incorrectly) undervalues BLN shares as they give no recognition to the Company’s growth profile,” he added. “We derive our $6.50/shr target price using a DCF analysis with a 10.0% discount rate and a 3.0% perpetual growth rate. Our DCF analysis is further corroborated by a comparables benchmarking analysis. With ~53% of sales coming from service revenues that are recurring, we feel it is more appropriate to contrast BLN’s multiples to other Canadian high-visibility tech companies. BLN’s 2.5x/5.7x NTM sales/LTM GP multiples compare to the peer median of 4.6x/7.3x (46%/22% discount), an unwarranted discount in our opinion. For reference, our DCF-derived target price implies a 3.1x/2.6x/2.2x F2025/F2026/F2027 revenue multiple.”