Kinaxis is fully valued, Industrial Alliance Securities says

Ahead of Q1 financial results from Kinaxis Inc. (Kinaxis Stock Quote, Chart, News: TSX:KXS), Blair Abernethy of Industrial Alliance Securities said on Wednesday that although the software company is still in the early stages of a potentially long-term growth opportunity in the supply chain management sector, he would like to see a more robust revenue growth rate before moving from his “Hold” recommendation.

Kinaxis will be reporting its first quarter 2018 results on May 2, with Abernethy expecting a top line coming in at $35.0 million (consensus is $37.3 million), which would represent a 7.7 per cent uptick year over year, as well as EBITDA of $8.8 million (consensus $9.7 million), representing a 25.4 per cent margin.

The analyst is looking for a 13 per cent rise in subscription revenue in Q1 and, for the year, 23 per cent sub growth to match that of 2017.

“With the Q1 results, we will again be keying in on increased contributions from partners, mainly Accenture (ACN-N, Not Rated) and Deloitte,” says Abernethy in a research note to clients. “We continue to believe that Kinaxis’ core customer base and pipeline of new vertical market opportunities, particularly in life sciences and automotive (Toyota was announced in January), remains robust and will drive 2018 gross billings.”

“While we believe Kinaxis can return to 20+ per cent top line growth this year, solid Q1/18 gross bookings are necessary to ensure that recurring revenue growth meets our target,” says the analyst. “At stock price current levels, we are maintaining our Hold rating.”

Kinaxis held its annual Investor Day on March 27, with management underlining its focus on growing the company’s sales team in Europe and Asia. Abernethy noted that new customers will be key to a faster revenue growth as the company is already about 35 to 40 per cent penetrated in its customer base, a fairly high penetration in the analyst’s estimation.

Abernethy has a 12-month price target of C$83.00 for KXS, arrived at through a blended EV/Sales, EV/FCF and DCF basis on his 2018 estimates. The analyst maintains his “Hold” recommendation and target price, which represents a projected return on investment of negative 1.4 per cent at the time of publication.