Why this small-cap ASX share could double in value

If you have a high tolerance for risk, then it could be worth considering the small-cap ASX share in this article.

That’s because analysts at Bell Potter have named it as a buy and are tipping huge returns over the next 12 months.

Which small-cap ASX share?

The small cap that Bell Potter is bullish on is Kinatico Ltd (ASX: KYP).

It is a leading provider of know your people solutions to organisations in Australia and New Zealand.

Bell Potter is expecting the small-cap ASX share to release a quarterly update next week.

The good news is that it believes the update will be positive and reveal double-digit revenue growth. However, it thinks the next quarter will be the one that shines. It said:

We expect Kinatico to provide a Q3 update – or Flash – sometime next week and our key forecasts are total revenue up 10% y-o-y to $8.9m and SaaS revenue up 29% yo-y to $5.2m (note this implies SaaS revenue is 58% of total revenue which is consistent with Q2). It is unclear if the company will provide EBITDA for Q3 or not but we forecast $1.4m. Note we do not expect Q3 to be a particularly strong quarter for either total or SaaS revenue and, for instance, we only forecast q-o-q growth of 4% and 6% for each respectively.

We have also not changed or updated our forecasts since the H1 result in February for recent events (e.g. the war in Iran) and there may be some downside risk in our total revenue forecast for Q3 due to some potential weakness in the legacy business CVCheck. We remain optimistic, however, that Q4 will be strong driven by a large uplift in SaaS revenue as some of the current pilots and trials for Kinatico Compliance (KC) with enterprise clients convert into contracts.

Big potential returns

According to the note, Bell Potter has retained its buy rating on the small-cap ASX share with a trimmed price target of 38 cents (from 40 cents).

Based on its current share price of 15 cents, this implies potential upside greater than 100% over the next 12 months.

Commenting on its buy recommendation, Bell Potter said:

We have lowered the multiple we apply in the EV/EBITDA valuation from 10x to 8x due to the continued weakness/sell-off in technology stocks. We have not, however, changed the 10.6% WACC we apply in the DCF given we already consider this reasonably high.

We note that, post this change in the EV/EBITDA, there is now a large difference between the two valuations – $0.20 and $0.57 – and the market is clearly not believing or factoring in any of the earnings and/or cash flow growth we forecast over the short to medium term. The net result is a 5% decrease in our target price to $0.38 which is >100% premium to the share price and we retain our BUY recommendation. We also note Kinatico is in a good financial position with c.$10m cash and no debt.

The post Why this small-cap ASX share could double in value appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.