Take a pass on Optiva, Canaccord Genuity says

Ongoing and significant restructuring on the part of subscriber management software provider Optiva Inc. (Optiva Stock Quote, Chart, News: TSX-RKN) has analyst Robert Young of Canaccord Genuity expecting more volatility ahead for the company. In a research update on Thursday, the analyst maintains his “Hold” recommendation for RKN with a target price reduction to C$1.05.

Optiva held its Annual General Meeting on Thursday, with shareholders voting to formally change the company name from Redknee Solutions to Optiva and to go ahead with a 50:1 share consolidation. The company is undergoing a massive restructuring, reducing its workforce from 1,200 employees to an estimated 600 and shutting down 18 offices worldwide.

Young says the break from the past will involve more focus on improving customer return on investment.

“We see potential for further customer churn during this transition year, but management has previously targeted CFO breakeven even when considering a scenario where revenue declines to ~US$100 million versus the $US120 million rough guidance,” says the analyst.

“Assuming Optiva can limit churn and execute against its $120 million base case, we see a path to get more positive on this stock,” says the analyst. “While incrementally confident, we expect volatility to continue and we note significant uncertainty on our forecast with limited guidance from management.”

Young has reduced his revenue estimates for F2018 and F2019 to reflect lost sales from two cancelled contracts during Q1/F18, along with an increase in Optiva’s operating cost profile due to increased spending on outsourced related party business services.

The share consolidation will reduce the company’s basic share count from 261.7 million to 5.2 million and decrease its diluted share count from 310.7 million to 6.2 million. As a result, the stock price will go from its current C$1.05 to C$52.50, which Young says is likely to improve the perception of the company.

“Optiva currently trades at 2.0x C2018E EV/Sales compared to BSS peers at 3.2x. This follows several quarters of volatility and considers a near-term outlook with a higher level of forecast risk. We believe that 2x NTM EV/Sales or 3x EV/NTM recurring sales is an appropriate multiple for a software company going through a transition period,” says the analyst.

Young’s revised forecast is for RKN to produce sales and EBITDA in 2018 of US$108.8 million (down from US$119.4 million) and negative US$17.7 million (down from US$12.4 million), respectively. In 2019, Young estimates sales and EBITDA of US$114.8 million (down from US$126.2 million) and negative US$2.8 million (down from US$1.5 million), respectively.

The C$1.05 target represents a 0.0 per cent return on investment at the time of publication.