Kinaxis’ (TSX:KXS) first quarter earnings may have come in a little soft, but the company is still seeing healthy subscription growth with an attractive EBITDA margin, says Canaccord Genuity’s Robert Young. On Thursday, the analyst maintained his “Buy” recommendation and price target of C$96.00.
Supply chain management software company Kinaxis announced its Q1/18 financials on Wednesday, with the company commencing to use the new IFRS 15 and 16 accounting standards. The change meant that year-over-year comparisons prove difficult, and thus, by the old standards, Kinaxis saw revenues for the quarter that were $35.9 million (a ten per cent increase) with an adjusted EBITDA of $9.2 million. (All figures in US dollars unless noted otherwise.)
But the Q1 revenue fell short of the consensus $37.4 million and Young’s own $37.2 million, while the Adj. EBITDA beat Young’s estimate of $8.3 million yet came up short of the Street’s $9.5 million.
“With shares flat since the company reported Q4/17 in early March, we would anticipate some weakness when trading opens due to misses on consensus figures,” says the analyst in a flash update to clients. “That said, absent any significant updates on the conference call [8:30 am EST May 3], we don’t anticipate Q1 results to meaningfully impact the company’s longer-term prospects.”
“Looking past the noise, we highlight the competitive differentiation of the offering and potential for growth given the growing profile, expanding sales force and increasing leverage of global channel partners. We see any weakness to be an attractive entry point for the stock,” he says.
Young believes that Kinaxis can continue its strong subscription revenue growth, predicting a rate of 25 per cent annually with a 25 per cent EBITDA margin in the long term.
“We believe a premium multiple is appropriate to reflect the company’s strong combination of subscription revenue growth and EBITDA margin,” he says. “Kinaxis trades at 9.3x C2018E EV/Sales and 7.7x C2019E EV/Sales, which is a premium to the peer average for larger SCM SaaS Vendors of 5.3x and 4.8x. Using our least squares regression methodology based on the combination of revenue growth and FCF margin, we believe a multiple of 8.5-9.5x C2019E revenue is appropriate.”
The analyst’s C$96.00 target price represents a projected return of 17 per cent at the time of publication.