We’re buyers of Mitel, National Bank Financial says

Solid results are trumping cloudy guidance when assessing Mitel (Mitel Stock Quote, Chart, News: TSX:MNW, Nasdaq: MITL), National Bank Financial analyst Richard Tse says.

This morning, Mitel reported its Q4 and fiscal 2017 results. In the fourth quarter, the company posted (All figures USD) EPS of $0.27 and EBITDA of $60.0-million on revenue of $356-million.

“Our strong fourth quarter performance driven by ongoing customer adoption of Mitel cloud solutions combined with continued solid revenue from our on-site business enabled us to exceed consensus estimates with revenue of $356-million,” said CEO Rich McBee. “In line with our move to the cloud strategy, we ended the year with an installed UCaaS subscriber base in excess of 1.1 million seats, and with UCaaS revenue up 158 per cent from a year ago. MiCloud seats installed via service providers in Europe also crossed the one-million-seat mark, a positive market indicator that our move to the cloud strategy is now gaining traction and speed in Europe as cloud momentum builds globally.”

Tse notes that Mitel’s fourth quarter results bested his expectations on EPS, where he had modeled $0.26 a share, on EBITDA, where his estimate was $53.0-million, and on revenue, where he had a $346.9-million estimate.

“Mitel reported solid Q4 results that were ahead of our expectations,” the analyst notes. “The offset –guidance for Q1 was mixed. That mixed guidance presents a challenge particularly given the shortfall to consensus was in EPS. In our view, the stock’s performance is contingent on a number of metrics; the most notable in our view is on Mitel’s ability to surface synergies from its ShoreTel acquisition. And while Mitel increased its synergy target to $75 mln from $60 mln, there’s a cost to that increase in synergies – incremental cash costs which will (once again) push out the timeline for +$100 mln in annual free cash flow. No doubt, even if the timeline is pushed back by six months, the stock is attractively valued but the hard reality is that such cash flow expectations have been pushed a few times already (in our view) which brings into question the Company’s ability to forecast its outlook or execution. That, in turn, reigns in the upward valuation re-rating in the short-term. At this point we’re maintaining our view that Mitel remains largely a de-levering story to the benefit of equity holders – but given the discussion above, we’ll obviously be reassessing that view after the Company’s Investor Day on Tuesday, February 27th in New York (also webcast). We’ll undoubtedly be focused on the data points to support our de-levering thesis and that cash flow is only being pushed out temporary (i.e., not something more structural). For now, we’re still buyers.”

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 29 per cent at the time of publication.

Tse thinks Mitel will generate EBITDA of $215.5-million on revenue of $1.32-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $248.2-million on a topline of $1.32-billion the following year.

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