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.