Kinatico Ltd (ASX: KYP) shares have pulled back sharply in recent months.
Since the start of the year, the small-cap ASX share has dropped approximately 40%.
Whilst this is disappointing, Bell Potter believes the weakness has created an attractive entry point.
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What is the broker saying about this small-cap ASX share?
Bell Potter notes that the Know Your People solutions provider has released its half-year results and reported first-half EBITDA of $2.7 million. This was below Bell Potter's forecast but broadly in line with market expectations. The broker said:
1HFY26 EBITDA of $2.7m was 10% below our forecast of $3.0m but consistent with VA consensus. Key driver of the miss versus our forecast was lower capitalised R&D than forecast ($1.7m vs BPe $2.0m). Revenue of $17.6m and cash of $10.4m had already been flagged. There was no interim dividend and we did not expect any.
Importantly, software-as-a-service (SaaS) revenue continued to grow strongly, rising 49% year on year to $9.7 million and is now accounting for 53% of total revenue. Bell Potter also highlights that the company generated positive free cash flow of $0.7 million and remains debt free.
'Disrupting, not being disrupted'
Bell Potter's note is titled Disrupting, not being disrupted, reflecting its view that Kinatico is well positioned in the evolving AI landscape. The broker highlighted:
Kinatico does not provide guidance but did say it expects: A re-acceleration of SaaS revenue growth as the sales pipeline for the new Kinatico Compliance product grows and converts; Continued improvement in operating margins; Positive operating cash flow being maintained; and Ongoing investment in platform development to support long-term growth. The company also highlighted that its early adoption of AI makes it an AI disruptor and its competitive position is protected by multiple reinforcing layers including having AI at the core of its new Kinatico Compliance (KC) product.
Shares tipped to double
According to the note, the broker has retained its buy rating on the small-cap ASX share with a trimmed price target of 40 cents (from 45 cents).
Based on its current share price of 19 cents, this implies potential upside of 110% for investors over the next 12 months.
Commenting on its buy recommendation, Bell Potter said:
We have rolled forward our EV/EBITDA valuation by a year – so that FY27 is now the base – and apply a 10x multiple to our forecast. We have also increased the WACC we apply in the DCF from 10.3% to 10.6% due to an increase in the risk-free rate from 4.25% to 4.5%. The net result is an 11% decrease in our target price to $0.40 which is still around double the share price so we maintain our BUY recommendation.
Potential catalysts include the Q3 update in April where we expect further q-o-q growth in SaaS revenue but the key catalyst is more likely to be the Q4 update where we expect more significant growth driven by the successful conversion of some large customers to the new KC platform.
