Know What You OwnHi all,
Had the chance to add a little bit today in the low 4.00 range, so I'm happy about that. I see a lot of new investors on this forum, so thought it prudent to remind everybody that the ups and downs of a stock price is very different from the value of a company. As Warren Buffett is fond of saying, in the short term the stock market is a voting machine, but in the long term it's a weighing machine. If there is value to be had in KNR shares, it will become increasingly evident as their businesses continue to be proved out and revenue is generated.
Since it's still early days with biocloud, we have to do our best to guess at valuations in the future. And that is not always easy, since there are plenty of moving parts and uncertainty. However, it pays to bear in mind this salient point: only if biocloud is a complete and utter bust, as has been suggested by some on this forum, is the company overvalued at the current share price. Although that is very unlikely for a variety of reasons, it's worth considering.
Here are four potential outcomes and how each would affect the company's VALUE.
1) IT'S A BUST: Biocloud amounts to nothing significant, and the share price falls back to levels related to the current smart building business + Toyota factories and European OEM blue sky potential. Based on comments by Paul in recent interviews, that seems very unlikely. But it's worth considering as the likelihood is more than zero percent. Personally, however, I think the probability of this outcome is low enough that I'm not willing to part with any shares.
If you don't think that biocloud is useful in the fight against covid, then KNR is probably not the company for you. We will know soon enough.
2) SLOW RAMP UP: Biocloud has a slow to moderate start and ramps up as the technology is proven out, or some other combination of technology, vaccine, or treatment is widely available. Since a vaccine likely wouldn't be available for several months at a minimum, I think Biocloud has a unique place in the fight against covid for the next few months at a minimum -- especially in schools, hospitals, mass transportation, etc.
Let's look at revenue outcomes and the likely effect on valuation:
1/4 of capacity would be 5,000 untis x 12 months x $12,000 CDN (deep discount) = $720 million
Assuming a conservative 10% margin, that would give the company ~$72 million in earnings and approx $1.85/share in profits (fully diluted)
This does not include revenue from smart buildings, Toyota factories, European OEM, or recurring revenue from replacing the biocloud chambers every three months.
As for valuation, you could justify 2x revenue but let's use 1.5x revenue to be conservative.
1.5x $720 million = $1.08 billion, which would suggest a share price of ~$28 based on a fully diluted float of 39 million shares.
Or you could value based on earnings, which I'd calculate at 15x $1.85 = ~$28 per share
3) FAST RAMP UP: Paul stated a couple of times on the recent Agoracom video that his phone has been ringing off the hook all weekend, with calls from around the world. We should therefore consider scenario three, where most or all of the capacity is bought in advance.
As I've stated in previous posts, I can imagine pressure for governments and/or corporate entities to act quickly, or risk losing out. In fact, this is very likely.
And if that happens we could see $3.6 billion in revenue over the course of a year. Even if it starts strong over the fall/winter months and peters out later in 2021, the market could price in this upside as other entities purchase capacity after school orders have been filled. Or it could be that international schools, in planning for next year, might place orders.
In any event, reports of more demand than supply could see the share price climb to somewhere between $50 and $100 per share.
4) EXPAND CAPACITY: A fourth case scenario is that demand is so high, and supply limited, that the company has to arrange for more capacity in 2021, as they've already alluded to. If that happens, I think this goes ballistic and could become a momentum stock that trades well past fundamentals. If there's some setbacks with vaccines, or the vaccine has limited effectiveness, the prospect of covid being around indefinitely would be a huge catalyst for governments to act.
In such a scenario I can't even imagine how high this could go, but as with Option A I think this is an outlier and probably unlikely.
In any event, this will be an intereting ride over the coming months. Do your own due diligence, and even if you decide to invest in KNR don't put all your eggs in one basket. Diversity is always a good thing.
GLTA