For Descartes Systems Group (TSX:DSG, NASDAQ:DSGX) strong revenue growth in Q4 and a recent dip in its share price mean that the stock is a “Buy,” says analyst Pardeep S. Sangha of Haywood Securities.
On Monday, Descartes Systems reported its fourth quarter fiscal 2018 and year ended January 31, 2018, results, showing revenues up 20 per cent on the quarter from the same period a year ago and adjusted EBITDA up 16 per cent from Q4FY17. Topline and adjusted EBITDA for the year were up 16 per cent and 15 per cent, respectively, over the previous fiscal year.
“FY18 continued the expansion of the customers connected to, and the solutions available over, our Global Logistics Network,” said CEO Ed Ryan said in a press release. We believe we have a solid, neutral platform for continued growth and acquisitions, with the experience and capital capacity to continue to increase the GLN’s influence.”
In an update to clients on Tuesday, Sangha says that the year-on- year growth for the SaaS-based logistics and supply chain management company came in-line with consensus estimates for revenue and adjusted EBITDA, while the February 2 acquisition of cloud-based transportation solutions company Aljex will prove to be an “attractive fit” with Descartes MacroPoint and transportation management products.
“We are forecasting 16 per cent revenue growth and 19 per cent adjusted EBITDA growth in FY19. We increased our revenue forecast due to the strong outlook for Q1, but kept our Adj. EBITDA forecast unchanged because of the lower margins with the MacroPoint and Aljex acquisitions,” says the analyst. “Our FY19 forecast is for revenue of $276.1 million (previously $270.5 million) and Adj. EBITDA of $95.9 million (unchanged). We are introducing our FY20 forecast with revenue growth of 8 per cent to $298.4 million and Adj. EBITDA growth of 12 per cent to $107.2 million. We are expecting Adj. EBITDA margins to improve from 34.0 per cent in FY18 to 34.7 per cent in FY19 and 35.9 per cent in FY20.”
DSG’s share price dropped 12.4 per cent from a high of US$31.23 on November 22, 2017. Sangha says this represents a buying opportunity, with the analyst saying that Descartes’ supply chain industry peers are currently trading at 26.9x EV/EBITDA whereas DSG is currently trading at 22.8x EV/EBITDA of consensus CY18 estimates.
The analyst maintains his “Buy” recommendation with an overall risk rating of “Moderate” and an unchanged target price of US$32.50, representing an 18.8 per cent return at the time of publication.