Espial is "significantly undervalued", says Haywood

Haywood analyst Pardeep Sangha thinks the market is ignoring the value in Espial’s (TSX:ESP) recent moves and in the opportunities on its immediate horizon.
Yesterday, Espial reported its Q3, 2016 results. The company lost $2.43-million on revenue of $6-million, down from the $8.7-million topline the company reported in the same period a year earlier.
“In Q3, we continued to roll out NOS’s next-generation UMA TV service to positive reviews in Portugal,” said CEO Jaison Dolvane. “We’ve also entered the final stretch of working towards a commercial launch for Tele Columbus in Germany with our products. Our success with these customers is positively impacting our sales pipeline, with service providers looking to adopt RDK-based solutions. “Our acquisition of the WHS platform from ARRIS expands our immediate addressable subscriber base and increases our scale in revenue, customers and engineering talent. We also signed a licensing and distribution agreement with ARRIS which scales distribution, integration and deployment of Espial solutions to video service providers globally. Our execution on these and other milestones in Q3 positions us well as service providers seek competitive advantage by introducing new IP video services with immersive user experiences.”
Sangha says Espial’s third quarter was essentially in-line with his expectations. The analyst says there are several catalysts on the horizon, including decisions from several operators. But he also believes that the market is not assigning enough value to a recent acquisition.
“We believe Espial is significantly undervalued, and the market is not recognizing any value for its recent WHS acquisition,” says Sangha. “Espial is currently trading at 0.9x EV/Revenue multiple of our CY16 estimates compared to the average of Espial’s Canadian software peer group and industry peer group of 3.1× EV/Revenue multiple of CY16 estimates. Our target price is based on a 2.8x EV/Revenue multiple of our FY17 estimate.”
In June, Espial announced announced an agreement to acquire ARRIS’s Whole Home Solution (WHS) platform, a turn-key IP video solution. Suwanee, Georgia-based ARRIS is the world’s largest supplier of cable set-top boxes.
In a research update to clients today, Sangha maintained his “Buy” rating and one-year price target of $3.75 on Espial Group, implying a return of 134.4 per cent at the time of publication.
Sangha believes Espial will post negative EBITDA of $6.9-million on revenue of $24.1-million in fiscal 2016. He expects these numbers will improve to positive EBITDA of $200K on a topline of $41.8-million the following year.