Atrium Research analyst Nicholas Cortellucci, in a research report published on August 27, 2024, initiated coverage on Kontrol Technologies Corp. (KNR:CBOE; KNRLF:OTCMKTS; 1K8:FSE) with a Buy rating and a target price of CA$0.35 following the company's recent asset sales and balance sheet restructuring.
Kontrol Technologies recently completed the sale of two subsidiaries, ORTECH Consulting and CEM Specialties (CEMSI), for over CA$24 million in total gross proceeds.
Cortellucci noted, "Through the sale of CEMSI and ORTECH, Kontrol has generated gross proceeds of over CA$24M, which has allowed the Company to pay down all of its debt, repurchase shares, and pursue future acquisitions."
The analyst highlighted the significant improvement in Kontrol's financial position, stating, "Debt levels went from CA$11.7M in Q4/23 to CA$0.4M in Q2/24, placing KNR in a large net cash position of CA$11.5M." He added, "Additionally, Kontrol repurchased 1.07M shares thus far in 2024, representing 2% of its shares outstanding."
Cortellucci sees potential for Kontrol to reinvest in tuck-in acquisitions, noting, "Following the dispositions, KNR is focusing on expanding its sustainable buildings platform via acquisition, which has recurring revenue and high margins." He emphasized management's track record, stating, "Management has completed nine acquisitions since 2016 and has proven that it can create value when selling assets in the private markets."
The analyst highlighted Kontrol's focus on two secular growth markets: smart building technology and HVAC services. "Kontrol operates in the smart building technology and HVAC services markets, both of which have secular long-term growth," Cortellucci commented.
Regarding valuation, the analyst noted, "KNR currently trades at a market cap of CA$12.0M despite its cash balance of CA$11.9M and subsidiaries that have proven sellable value in the private markets." He added, "Thus, KNR trades at 0.9x/0.5x 2024E/2025E EBITDA compared to public peers at 13.7x/11.4x and private transactions that have occurred at 6-9x."
Atrium Research's valuation methodology for Kontrol Technologies is based on an EBITDA multiple. "We assume 8.0x 2025E EBITDA to arrive at our CA$0.35/share target price. We will look to increase the multiple as KNR grows to [a] larger scale via acquisition," Cortellucci explained.
With a Buy rating and a target price of CA$0.35, representing a potential return of 67% from the price at the time of the report, Atrium Research sees significant upside potential for Kontrol Technologies.
Cortellucci concluded, "Given its large cash balance, KNR trades at only 0.5x 2025E EBITDA," suggesting the stock is undervalued at current levels.
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Disclosures for Atrium Research, Kontrol Technologies, August 27, 2024
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