Mitel is undervalued, National Bank Financial says

With the acquisition of ShoreTel complete, National Bank Financial analyst Richard Tse is feeling bullish about Mitel (Mitel Stock Quote, Chart, News: TSX:MNW, Nasdaq:MITL).

In a research update to clients today, Tse maintained his “Outperform” rating, but raised his one-year price target on Mitel from (U.S.) $10.00 to $11.00, implying a return of 25 per cent at the time of publication, including dividend.

Tse says Mitel has a proven ability to produce superior synergies from its acquisitions, as the recent integration of Aastra proved. He expects the integration of ShoreTel will be more of the same, adding that Mitel’s target of $60-million in synergies could ultimately prove conservative.

“In our view, we see a meaningfully accretive acquisition (in fiscal 2018 and 2019),” the analyst says. “More importantly, we think the acquisition returns Mitel back on its former path of market consolidation and in our view ShoreTel’s scale will help fortify that strategy through product breadth and an expanded channel (2,000-3,200). The harsh reality is that the enterprise communications market is mature and structural changes like a shift to cloud services from legacy on-premise means there’s an oversupply of players. This is also why we’ve seen a decline in the on-premise business of Mitel within the range of 8-10% annually. Yet, we believe there’s an opportunity to “take out” capacity while pivoting to growth segments of the market as in the case of cloud services where growth rates are in the range of 20%. In our view, it’s the combination of that pivot to cloud (Growth) and market consolidation (Value) that should drive upside to MITL / MNW’s stock price based on our updated forecasts; we don’t think either of those are fully reflected in the stock price. We’d be buyers.”

Tse thinks Mitel will generate EBITDA of $127.4-million on revenue of $1.02-billion in fiscal 2017. He expects those numbers will improve to EBITDA of $203.4-million on a topline of $1.28-billion the following year.