The risk/reward scenario on Espial Group (TSX:ESP) is extremely compelling, says Mackie Research Capital analyst Nikhil Thadani.
In a report to clients this morning, Thadani initiated coverage of Espial with a “Speculative Buy” rating and a one-year target price of $4.00, implying a return of 178% at the time of publication.
Thadani thinks Espial offers more than 180% upside with just 20% downside potential. He points to the company’s reliable recurring revenue as supporting a share price of $1.10 on its own. But the analyst says the company has a huge opportunity in the next-generation cable Set-Top Box (STB) “refresh cycle”. He thinks Espial is an early leader in the space and could announce two or three new wins in 2015, having already initiated three Reference Design Kit (RDK) pilot programs.
Cable companies worldwide, says Thadani, are becoming more likely to adopt internet-based television because their collective growth rate has slowed considerably. “Next-generation cable TV set-top boxes based on an open Reference Design Kit standard (RDK) are an important part of cable providers’ subscriber retention strategy,” explains the analyst. “Next-gen RDKbased STBs provide significant tangible benefits to pay TV providers including faster and more immersive user interface (front end) customization, potential for reduced capex and opex from fewer truck rolls, according to industry sources.”
Thadani cites research from IHS that says US homes with pay TV service are expected to drop to 81% in 2017 from 84% in 2014. He notes that Espial has had discussions with 20-25 of the largest cable and satellite operators, and expects that many will adopt RDK-based STBs “within the next two years”. The analyst thinks the total addressable market for Espial is about a half-billion dollars, with the potential for annual recurring revenue of between $60 and $90-million.