This Canadian smallcap stock is undervalued, analyst says

ATB Capital Markets analyst Martin Toner maintained an “Outperform” rating and $10.00 target for Blackline Safety (Blackline Safety Stock Quote, Chart, News, Analysts, Financials TSX:BLN) in an Aug. 21  note after the company announced its first purchase order under a multi-year agreement with Abu Dhabi National Oil Company (ADNOC).

The initial order is for 1,000 G6 devices and 1,200 location beacons, secured through channel partner Al Masaood. If extended to the full 28,000 devices outlined in the agreement, Toner said it would represent one of Blackline’s largest contracts to date.

“We believe this contract is a good example of the potential that exists for Blackline in the Middle East and globally,” he said. “Blackline is growing market share with a market-leading gas detection device. Connectivity enables safety and value-added services. In our view, Blackline Safety is an authentic, organic growth story with an attractive business model. We continue to believe a valuation of approximately 3.0 times NTM P/S undervalues the company.”

Toner described ADNOC as a “land and expand” opportunity. “ADNOC produces four million barrels of oil per day and likely has significantly more than 28,000 workers that it needs to protect with gas detection devices,” he said.

He added that the G6 is a “gateway” product, with potential for future orders of the higher-priced G7.

“With a customer of ADNOC’s size, this could be significant to the value of the initial order,” he said.

He estimated that if the initial order included a services component of $1,000 to $1,500 per device per year for four years, it would be worth about $1-million. A full 28,000-device order would represent roughly $30-million in revenue over the term of the contract. Because the G7 carries a price about five times higher than the G6, expanding the agreement could significantly increase its value.

Blackline said the Middle East represents a significant growth opportunity. Globally, management estimates the company has penetrated about 25% of existing customers and holds just 4% of the gas detection hardware market. Over time, management expects to grow its market share in gas detection hardware to 20%, with additional upside from its SaaS platform, which it said will further expand its total addressable market.

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