M Partners’ Shuttleworth raises target on Mitel to $7

M Partners analyst Ron Shuttleworth says Mitel’s (Mitel Stock Quote, Chart, News: TSX:MNW) acquisition of its supplier PrairieFyre Software is a move that will mean more business and increased margins for the company’s contact centre business.

Yesterday, Mitel announced it would acquire privately held PrairieFyre for $20-million. PrairieFyre, like Mitel is based in Ottawa, and has been the OEM for most of Mitel’s contact center suite since the nineties.

CEO Rich McBee says the deal makes sense, considering industry trends.

“Mitel’s strategy centers on delivering profitable growth to our customers, partners and shareholders. In response to customer demand, many of our IT resellers have started building out specialized contact center practices and are asking for a solution tightly integrated and aligned with Mitel’s product development and roadmaps,” he said. “We believe the highly integrated nature of our existing OEM relationship with prairieFyre prior to the acquisition makes this a low risk, high reward and compelling opportunity to immediately capitalize on market demand, expand revenue and margins, and positions Mitel for ongoing growth.

Shuttleworth says because PrairieFyre was already tightly integrated into Mitel’s business, the topline effect will be negligible, at least initially. But he says the acquired business should have a more meaningful impact on margins, and he thinks those margin improvements should flow almost directly to earnings. He thinks an increase in net sales, combined with margin expansion, should add about $4.5-million of adjusted EBITDA to his fiscal 2014 forecast, which would increase EBITDA to $111.4-million, up from his previous forecast of $105.9-million.

Shuttleworth says yesterday’s acquisition comes at a time when Mitel’s peer group multiples are expanding dramatically. He thinks Mitel has a real leg up on its hardware oriented peers because it has its channels can deploy more quickly owing to the company’s virtualized platform.

In a research update to clients this morning, Shuttleworth maintained his BUY rating on Mitel, but raised his one-year price target by two dollars, to $7. He says there is also room for this target to move higher, as Mitel will reports its Q4 and fiscal 2013 financials next Monday, at which time his measurement year will roll forward to fiscal 2014.

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