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Descartes Systems Group’s financing could really accelerate its growth, says Cantor Fitzgerald

descartes systems group

Descartes CEO Ed Ryan.
Descartes CEO Ed Ryan.
What happens after Descartes Systems Group (TSX:DSG) deploys the $160-million it proposes to raise, Cantor Fitzgerald Canada analyst Blair Abernethy wonders aloud.

In a research update to clients this morning, Abernethy maintained his “Buy” rating and (US)$15.50 one-year target on Descartes. Because the financing has not closed, the analyst says he is not making changes to his estimates (he expects Descartes will post EBITDA of $51.6-million on revenue of $174.8-million in fiscal 2015 and EBITDA of $56.4mn on a topline of $190.2-million in 2016), but speculated as to what he company might look like post financing.

Yesterday, Descartes announced it will, through a syndicate of underwriters co-led by Morgan Stanley, Barclays and GMP Securities, sell 9.5-million common shares, plus an overallotment option of 1.425-million shares, for a total proceeds of a little more than $160-milion.

Abernethy envisioned a scenario in which the proceeds of yesterday’s proposed financing were deployed through acquisitions over the next year. Noting that Descartes has, historically, paid 8x-10x EBITDA for acquisitions, he notes that the same level would increase the company’s fiscal 2016 EBITDA by 24%-26%, up to $69.8 to $72.4-million. At the extreme ends of the spectrum, acquisitions done at 14x would increase EBITDA by 20%, to $67.9-million, and the bargain basement scenario of 6x would see a 47% bump in EBITDA, to $83.1-million.

For now, Abernethy notes that Descartes is currently trading at 17.1× his estimate of 2016 earnings, a multiple he says it deserves due to its solid margins, stable business model, and the cross-selling opportunities presented by its expanded product offering.

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.
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