Absolute Software still isn’t a buy, Paradigm Capital says

A quarter that was in-line with expectations isn’t shaking Paradigm Capital analyst Kevin Krishnaratne off his “Hold” rating on Absolute Software (TSX:ABT).

On Monday, Absolute Software reported its Q3, 2018 results. The company earned (US) $1.05-million on revenue of $23.3-million, a topline that was up three per cent over the same period last year.

“Absolute’s visibility and control platform goes beyond other solutions in the space by protecting the weakest link within the security landscape,” interim CEO Steve Munford said. “Over the past quarter, after discussions with our current and prospective customers, as well as our partners, it’s clear that Absolute has an opportunity to accelerate its growth rate with laser focus and a sense of urgency on specific market segments where our success rate is highest, including regulated and highly mobile markets. We plan to direct resources into those specific markets and rapidly build a repeatable process for success.”

In a research update to clients today, Krishnaratne maintained his “Hold” rating and one-year price target of $8.00 on Absolute Software, implying a return of 17.5 per cent at the time of publication. The analyst explained the reasoning behind his take.

“Our C$8.00 target reflects an EV/Sales multiple on FY19 estimates of ~2.0x, which is a discount to other Information Security comparables (5.1x) and Canadian Software peers (6.3x),” he said. “Higher multiples for the peers we track are a result of higher revenue/EBITDA growth, margins, or M&A-driven business. As such, we continue to believe Absolute should be valued at a discount to other information security and Canadian software peers. We continue to suggest investors wait for a more material rebound in top-line trends before becoming more constructive on the name. We maintain our Hold recommendation and C$8.00 target.”

Krishnaratne thinks ABT will generate EBITDA of $8.6-million on revenue of $93.7-million inn fiscal 2018. He expects those numbers will improve to EBITDA of $12.5-million on a topline of $99.9-million the following year.