Avigilon would command a big price in a take-out, says Haywood

A quarter of “mixed” results isn’t shaking Haywood Securities analyst Pardeep Sangha’s conviction that Avigilon (TSX:AVO) is undervalued, particularly as a target for another firm.

Yesterday, Avigilon reported its Q1, 2017 results. The company lost (all figure is USD) $1-million on revenue of $80.3-million, a topline that was up 15 per cent over the $69.9-million the company posted in the same period last year.

“Marking our 37th consecutive quarter of year-over-year revenue growth, in Q1 we increased cash flow from operations by $12.5-million and reported strong gross margins,” said CEO Alexander Fernandes. “In addition to strong revenue and operating results, we launched innovative new products and led the industry with powerful video analytics. Subsequent to quarter-end, we promoted James Henderson to chief operating officer and entered into an agreement to sell and lease back our downtown Vancouver office tower for expected gross proceeds of $107.5-million. These actions demonstrate our commitment to unlocking value across the business as we focus on increasing profitability.”

Sangha says Avigilon’s Q1 topline growth was a little softer than he expected, but says he continues to see the company as undervalued. The analyst today reiterated his “Buy” rating and one-year price target of (C) $25.00 on the stock, implying a return of 62.4 per cent at the time of publication. But he says there is a way in which investors could realize an even larger return than that.

“We believe Avigilon could be valued even higher than $25.00 as a take-out candidate,” says Sangha. “Avigilon is currently trading at 9.0x EV/EBITDA of our CY17 estimates, which is below the peer group average of 12.3x EV/EBITDA of CY17 consensus estimates. Our target price represents an 11.8x EV/EBITDA multiple of our CY17 Adjusted EBOTDA estimate or 9.1x EV/EBITDA multiple of our CY18 Adjusted EBITDA estimate. Using comparable acquisitions in the past on average of 13.9x EV/EBITDA multiples, Avigilon would be valued at over $35.00 per share based on our CY18 estimates.

Sangha thinks Avigilon will post Adjusted EBITDA of $66.6-million on revenue of $417.5-million in fiscal 2017. He expects these numbers will improve to EBITDA of $86.7-million on a topline of $478.0-million the following year.