Cormark analyst Richard Tse says Ottawa’s Mitel Networks (TSX:MNW) should be on every investor’s radar.
In a research update to clients this past Friday, Tse reiterated his TOP PICK rating and (U.S.) $12.50 one-year target on Mitel, which is also listed on Nasdaq under the symbol “MITL”.
Tse says that following Mitel’s acquisition of peer Aastra there are “multiple drivers” of value for the company, including an expanding cloud business that he feels is not currently priced in the stock. He says the company is on the verge of benefiting from an upgrade cycle in enterprise communications and Aastra will give it operating leverage to win new business.
Tse met with Mitel CEO Rich McBee recently to talk about the pace of the integration of Aastra and the opportunity the company has in the cloud. He came away, he says, with the impression that the melding of the two companies is on track. Aastra, he points out, had gross margins in the mid-40% range, while Mitel’s are in the mid-50s. He believes Aastra’s margins can be be pulled up to Mitel’s level.
But Aastra aside, Tse says there is a real growth business in the cloud for Mitel. He points out that by taking existing customers on-premise PBX systems into the cloud, the company unlocks a recurring revenue stream and higher margins. While virtualization currently accounts for less than 10% of Mitel’s topline, the Cormark analyst says there is a big runway because fewer than 330,000 of its more than 60-million subs have made the switch to the cloud.
At press time, shares of Mitel on the Nasdaq were up 2.1% to $9.68.
Below: Terry Matthews talks about the early days of Mitel…