Mitel is undervalued, National Bank Financial analyst Tse says

Following another quarter he describes as “solid”, National Bank Financial analyst Richard Tse says Mitel’s (TSE:MNW, Nasdaq:MITL) current share price doesn’t reflect the company’s potential cash flow looking forward.

This morning, Mitel reported its Q3, 2017 results. The company lost (U.S.) $26.8-million on revenue of $241.5-million, a topline that was up 2.9 per cent over the same period last year.

“Mitel delivered solid financial results in what was a very busy quarter for the company. Enterprise customers transitioning to the cloud helped push our cloud bookings up over 30% to a new record while revenues grew 24% on an as-reported basis. With the completion of the ShoreTel acquisition, we significantly accelerated our cloud strategy, moving Mitel firmly into the #2 position in the UCaaS market on a worldwide basis,” said CEO Rich McBee. “With the integration process well under way, we believe that the combined company is ideally positioned to leverage our global scale and strength, and market leading positions in Europe and North America to take customers to the cloud any way they want {A –} leveraging on-site investments, a hybrid solution, or straight to the cloud.”

Tse notes that the quarter was basically in-line with expectations, but says he still sees a disconnect.

“Bottom line, the Q3 results reaffirms our view that Mitel’s stock price does not reflect the potential cash flow looking ahead, nor the opportunity for a re-rating from Cloud (growth),” the analyst says. “As such, we continue to see value and growth from Mitel. Bottom line, at a forecasted FCF yield of 7.5% in F2018E and 12.5% in F2019E we continue to see upside from here.

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $11.00 on Mitel, implying a return of 26 per cent at the time of publication.

Tse says Mitel’s recently completed acquisition of ShoreTel isn’t getting enough attention for the way it could improve the company.

“Overall, we believe the ShoreTel acquisition is akin to Mitel’s 2014 acquisition of Aastra – rapid cost synergies followed by revenue synergies +18 months after close,” he says. “Strategically, we believe the timing of ShoreTel given what we believe to be a market that has shown signs of an accelerating decline in a legacy premise business. The ShoreTel acquisition takes the Company back to the role as one of the few consolidators in an oversupplied market. We happen to think that Mitel’s strategy is value creating from a cost and capacity perspective while scale is allowing it to consolidate market share.”

Tse thinks Mitel will generate EBITDA of (U.S.) $137.3-million on revenue of $1.05-billion in fiscal 2017. He expects those numbers will improve to EBITDA of $208.6-million on a topline of $1.31-billion the following year.