Kinaxis still has double-digit upside, National Bank Financial says

Solid Q4 results and accelerating momentum from Kinaxis Inc. (Kinaxis Stock Quote, Chart, News: TSX:KXS) are enough to maintain its “Outperform” rating and one-year target price of $100.00 Cdn, says Richard Tse, analyst with National Bank Financial Markets.

Supply chain software company Kinaxis reported its fourth quarter 2017 and full year ended December 31, 2017, results on Wednesday, recording its 15th consecutive quarter of revenue growth. Annual subscription revenue grew by 23 per cent and annual adjusted EBITDA came in at $40.1 million (all figures in USD unless otherwise noted), representing 30 per cent of revenue.

“Today’s results reflect both strong top line and bottom line growth,” said John Sicard, Kinaxis CEO, in a press release. “We continue to win exciting new customer contracts as a result of our global expansion investments, including Toyota, recently announced. Customers continue to expand their subscriptions as they look to broaden the value they receive from our products. Our success is driven by the strength of our internal team combined with our ever-expanding partner network supported by the launch of our Partner Enablement Program this past quarter,”

Tse calls Kinaxis’ Q4 growth solid across the board, with revenue of $34.4 million versus his $34.5 million estimate (consensus was $34.7 million) and adjusted EPS of $0.30 versus his $0.24 estimate (consensus of $0.23).

EBTIDA margins in the company’s 2018 guidance came in below estimates, but Tse says that’s not a problem.

“In many cases, that might be viewed negatively but in this case, it appears to be a reflection of growing momentum in the business that’s consistent with our channel checks,” says Tse in a note to clients on Thursday. “For 2018, Kinaxis has made a decision to scale investment, particularly in sales and marketing (S&M) to service what appears to be a growing pipeline – again, consistent with our own channel work.”

Tse notes that Kinaxis is also targeting subscription revenue of 23 to 26 per cent in 2018, in part due to expansion of its data centre infrastructure.

“We continue to believe KXS’ valuation does not fully value a “normalized” financial run-rate looking ahead, particularly given what we estimate to be a market share of less than 5 per cent,” says the analyst. “So, while KXS’ EV/Sales valuation of 8.0x may be a bit robust; when we consider the runway, and compare the name to other early disrupters, it’s not surprising why we continue to rate KXS an Outperform.”

Tse predicts a 2018 revenue and EBITDA of $162.1 and $42.1, respectively, followed by a 2019 revenue and EBITDA of $194.6 and $57.1, respectively.

In a research update to clients Thursday, the analyst maintained both his “Outperform” rating and one-year target price of $100.00 (CDN) on Kinaxis, with a risk rating of “above average.” The target price represents a 20 per cent return on investment at the date of publication.