Negativity on Espial Group has gone too far, says Euro Pacific's Goff

The negativity around some lost business has weighed on Espial Group (TSX:ESP) for too long, says Euro Pacific Canada analyst Rob Goff.
In late October, Espial announced that an unnamed tier-one North American operator would not deploy the company’s next-gen RDK solution.
“In the third quarter, we delivered software licences for current generation and new 4K set-top boxes to a channel partner for deployment at a North American cable operator,” explained CEO Jaison Dolvane. “The same operator is currently working on its next-generation platform, and we have been informed that this operator does not intend to deploy our software as previously contemplated, and we are in discussions regarding this. We continue to work with our channel partner and operator to improve current user experience and deliver 4K ultrahigh definition on its current platform.”
On Thursday, February 25, Espial will announce its Q4 and fiscal 2015 results. The company’s shares, which had neared the $4.00 mark before the October news, have fallen to less than half that.
But Goff thinks the reaction to the Espial news is overdone. He says investors who stick it out are set to realize “aggressive” returns. The analyst says he is modeling Espial winning MSO (“Multiple System Operators, an industry term for a cable company) contracts covering more than 17-million subscribers over the next five years. He notes that the company says it expects six MSOs with whom it is in advanced discussions to move forward within the next 12 months.
“The uncertainty and prospective lost business associated with the N. American provider and the lack of announced wins have clearly weighed on the shares, taking the enterprise valuation down to $11M for a company expected to generate positive FCF for 2016,” says Goff. “We note that the enterprise valuation for Espial was $85M last May. We continue to believe Espial is uniquely positioned to capture an impressive share of the looming RDK/HTML5 adoption.
Goff says the halving of the companies shares price has removed the benefit of the doubt he thinks the company likely still deserves.
“The shares clearly reflect a show-me perspective where potential new wins and early feedback on the two European field deployments are critical catalysts over the next two quarters that will serve to highlight the actual size of the contracted MSOs while the field deployments provide evidence of customer uptake and allow prospective customers to potentially skip the paid POC trial stage,” says the analyst.
In a research update to client today, Goff maintained his “Buy” rating and one-year target price of $4.25 on Espial Group, implying a return of 137.4 per cent at the time of publication.