With significant acquisitions driving its growth and a recent drop-off in its share price, Descartes Systems Group Inc. (TSX:DSG, NASDAQ:DSGX) is a good pickup, says analyst Pardeep S. Sangha with Haywood Securities, who currently rates the logistics company a “Buy” with a one-year target price of $32.50.
Waterloo-based SaaS company Descartes Systems will be reporting on its Q4 FY18 results on March 5, with acquisitions being a key focal point, says Sangha.
“Since 2012, Descartes has undertaken 19 acquisitions worth a total of approximately $403 million,” says the analyst in an earnings preview to clients on Tuesday. “Over that timeframe, the Company’s enterprise value has increased from $290 million to $1.6 billion. Descartes is emerging as the leading consolidator in the industry. The logistics and supply chain markets remain fragmented and ripe for consolidation.”
In early February, Descartes announced the acquisition of Aljex Software Inc., a cloud-based provider of transportation management software headquartered in Somerville, New Jersey. The deal for $32.4 million USD in cash will help Descartes with its end-to-end supply chain solutions, says CEO Edward J. Ryan. “We now have an opportunity to fully integrate Aljex into the Global Logistics Network. In doing so, we can provide customers with improved access to track shipments and the ability to better utilize increasingly scarce carrier capacity,” says Ryan in a press release.
Sangha says he expects 20 per cent year-on-year growth from DSG, with a Q4FY2018 coming in with revenue of $63.5 million, compared to last year’s fourth quarter topline of $52.8 million.
“We are expecting Adj. EBITDA margins of 34.3% in Q4FY18, a decline from 35.1% in Q4FY17 due to the lower margin MacroPoint business. Last quarter Descartes reported record results for Q3FY18, but markets responded negatively due to weaker than expected EBITDA margins,” the analyst says.
DSG’s stock has been on a steady upward trajectory over the past half-decade, while a slight dip to start out 2018 only adds more reason to pick it up, says Sangha. “We believe the recent decline in Descartes’ share price represents a buying opportunity for investors. Descartes’ share price has declined 15.5% since its recent high of US$31.23 on November 22, 2017. Descartes currently trades at 22.2x EV/EBITDA multiple of CY18 consensus compared to the industry peer group that trades at 26.6x EV/EBITDA multiple,” says the analyst.
Sangha says that on the conference call, he’ll want to hear about DSG’s progress on integrating key acquisitions Aljex and MacroPoint and about further acquisitions down the pipeline, along with more detail on the company’s projected EBITDA margin improvement for FY19 and FY20.
The analyst rates DSG a “Buy” with a one-year target price of $32.50, representing a projected return of 23.1 per cent based on share price at the time of publication.