Over here at Equity Insight, we pride ourselves on doing the hard research and providing deeper insight than anyone else on issuers we profile and track. We are proud to say that in November 2018 (Nov.’18 EI Report) we initially introduced Kontrol Energy (CSE: KNR) to our audience. In the last 2 years, we got to know management extremely well and build a tremendous amount of confidence in them. Since we met Paul and the team we have seen them execute their plan, grow shareholder value and continue to demonstrate that they are true Canadian business leaders with the vision, ability, expertise and the product offering worthy of global notoriety.
Given our confidence in the team at KNR, the news of and excitement after the initial announcement of the BioCloud technology for rapid on-site air detection and alerting of pathogens, notably COVID-19, we think that KNR shares still have at least 5x if not 10x oe more potential today, even from the Friday closing price of $4.88 and a market cap of $150 million.
It is very important that we note that, to the best of our knowledge, the Kontrol Energy BioCloud technology for real-time COVID-19 detection and alerting is the only such technology in the world. If you thought Google or Apple had moats around their business...
Fun with math and some extrapolations for existing clients
Here are some quick facts about Kontrol Smart Building products prior to the BioCloud (source):
- All patented at USPTO and CSA approved
- All commercially sold
- Clients include Toyota Tsusho, Oxford Properties, Brookfield Properties and others
Based on the above 3 points, we can safely say that Kontrol has experienced developing, certifying, building a supply chain and sales network for technologies to be deployed in industrial, commercial and institutional properties.
We can also say that their current clients have potentially hundreds of millions of square footage under management that need to be protected. Consider that Brookfield Properties has over 27 million square feet of office space alone in Toronto and New-York alone (source), Toyota has plants all over the world (source) and Oxford has a global luxury portfolio of assets (source).
On repeated occasions, notably in this interview on the CBC and in the September 11 news release, Kontrol has stated that one of the first use cases for the BioClous would be in schools. Considering the average classroom size in square feet is about 900 sqft in the United States (source) and in Canada is about 750 sqft (source), we will infer that each BioCloud unit is being designed and tested to cover an area of approximately 1,000 sqft.
We will also assume that as publicly stated BioCloud is going to be selling for USD $12,000 and that supply chain capacity is 20,000 units per month (source).
Therefore, we could infer that Brookfield will require 27,000 units (27,000,000/1,000) for their Toronto and New-York office space alone which could generate USD $320,000,000 (that's about CAD $421,000,000) in revenu and 1.5 months of production capacity to fill the order(s).
Now the above example is extremely simplistic. For example, elevators are not 1,000 sqft and could each require one BioCloud unit; building managers may not put a unit in a janitorial closet or low traffic open space areas. That being said, even if we cut the numbers in half, Brookfield could generate hundreds of millions in sales for Kontrol’s BioCloud. Just based on Kontrol’s current clients, we believe there is a multi-billion dollar opportunity on the table.
Here is another fun example: there are about 2,000,000 students in publicly funded schools in Ontario (source) and roughly 26 students per class (source) which equates to roughly 77,000 classrooms. If one unit is required per class, that is USD $924,000,000 (CAD $1,217,000,000) in revenu and could take up to almost 4 months of capacity to fill the order. That’s just public schools in Ontario. Not private schools. Not the rest of Canada. Not universities.
We are by no means suggesting that Kontrol will have a market penetration rate of 100% but anyone with basic analytical skills and a calculator can see that the market size here is enormous, many billions of dollars annually we think.
Based on the very limited examples above, it may not be surprising for the production capacity to max out pretty quickly if the sales channels perform well. So, if the demand dramatically outpaces supply, what will that do to pricing? Could Kontrol hypothetically raise prices?
Potential impact on the stock
We are of the opinion that based on all of the publicly available information disseminated by Kontrol, our confidence in management, some basic calculations and a good dose of speculative fervor, KNR has the potential to trade up 500% even 1,000% or more from the closing price of $4.88 on Friday September 11, 2020. That’s right, we think KNR could trade up to $25.00 or $50.00 or more.
We think that for a variety of factors, KNR stock could could be compared to:
- PyroGenesis (PYR) because of a similar high insider ownership and financial profile. PYR has had a monster run in 2020 from a low of about $0.19, a market cap of about $28M, to a high of $6.43 and a market cap of over $900M.
- Sona Nanotech (SONA) for being an innovator in the COVID-19 industry. SONA has also had a monster run in 2020. In fact we brought SONA to your attention at $0.51 and a $36M market cap in our March 16 Coronavirus article. SONA subsequently traded up to $16.05 and a market cap of $965M, an ROI of over 3,000% from our publication date.
As at September 1, 2020 KNR has 31.5M shares out, 41% insider ownership and a float that is getting increasingly tighter as people find out about the story. We believe that, based on everything we have outlined and many other factors including but not limited to the fact that the 2 main comparables in the Canadian small-cap universe have run to 900M market caps, KNR will also have a run to 900M or about $28.00. That’s the raw speculators bet.
The more informed speculative bet would be that Kontrol Energy quickly maxes out capacity for the production of the BioCloud units because there is literally no competition in the market and the demand is absolutely mind blowingly huge. At a max capacity of 20,000 units selling at USD $12,000, Kontrol sales would be around USD $240,000,000 per month or about USD $2,880,000,000 (that's 2.88 billion). Given that KNR is listed in Canada and reports in CAD that number is about CAD $3.8 billion in sales.
In our experience, small and mid-cap companies tend to get a valuation close to 2x sales in the public markets. All things being constant in the above known facts, the basic extrapolation here could yield us a potential stock price of $120 (!). Even if we take that wild $120 inference, cut it in half (120/2=60) and knock off another $10, you get to $50 which is 10x and a bit from $4.88.
Bull and Bear Cases
In the Bull case, what happens if demand wildly outpaces production capacity for the BioCloud? What happens if there is rampant speculation frenzie and the stock trades at 10x sales or more like Tesla (TSLA), Shopify (SHOP) and the rest of the tech darlings? What happens if the COVID-19 pandemic lasts for multiple years and intensifies? Would KNR trade past $120?
In the Bear case, what happens if there is suddenly a universal vaccine and immediate global inoculation or a competitor is commercialized tomorrow? We obviously think these are lower probabilities but, even if there was a black swan type event for Kontrol, there is a profitable and growing business that pre-dates the BioCloud business line and we think the BioCloud line would still book considerable sales.