Haywood lowers price target on DataWind to $4.50, maintains buy

A dispute with its auditors has Haywood analyst Pardeep Sangha feeling a little less bullish about DataWind (DataWind Stock Quote, Chart, News: TSX:DW).

Yesterday, DataWind issued a press release in which it explained that its auditor Deloitte was in fact responsible for the company missing its reporting deadline.

“In light of the challenges in concluding this audit and the company’s past experience with Deloitte, it has become clear that a new auditor will be required to complete the audit,” said DataWind management, noting that it has initiated discussion with two other firms.

Sangha says he is pleased to learn that the delays were not due to accounting fraud or negligence.

“DataWind blames its auditors, Deloitte, as the reason for its late filings,” explains the analyst. “The central issue is the revenue recognition policy related to one of DataWind’s channel partners, which appears to have surfaced in mid-July. This issue remains unsolved as DataWind believes its application of accounting principles is correct because this customer has historically remitted payment faster than the average customer, and has fully paid what was owed at year end during the subsequent three months. A new auditor is expected to complete the audit as early as October 31, 2016. We were relieved to find out that the delays in filing the Company’s financials were due to a disagreement of accounting principles and not something more serious. We find it rather odd that Deloitte did not bring up this central issue until several weeks after the initial filing date, and that the Deloitte India audit team has indicated that it did not come to the same conclusion as the Deloitte Canada team.”

In a research update to clients today, Sangha maintained his “Buy” rating on DataWind, but lowered his one year price target from $6.00 to $4.50, implying a return of 268.9 per cent at the time of publication. The analyst explains the price reduction is due to a lower valuation multiple as a result of further delays in DataWind filing its financials.

Sangha believes DataWind will post Adjusted EBITDA of $100,000 on revenue of $59.9-million in fiscal 2016, numbers he expects will climb to EBITDA of $5.2-million on a topline of $95.1-million the following year.

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