Take a pass on Descartes Systems, Haywood Securities says

Descartes Systems Group’s (DSGX:NASDAQ, TSX:DSG) record quarterly results including a consensus beat on revenue are not enough to keep Haywood Securities’ Pardeep S. Sangha from downgrading his rating from “Buy” to “Hold.”

The reason? Descartes share price is already up 26 per cent from February 9.

SaaS logistics company Descartes Systems released its Q1FY19 financials on Wednesday, boasting a topline of $67.0 million, which is up 23 per cent year over year and coincides with a 16 per cent jump in Adj. EBITDA. (All figures in US dollars unless noted otherwise.)

“Our Global Logistics Network (“GLN”) helps isolate customers from complexity by giving them one place to manage the lifecycle of shipments,” said CEO Edward J. Ryan in a press release. “As we continue to add more solutions and connected parties to the GLN, our customers trust us with more of their business, which is reflected in these record financial results.”

Sangha says that while Descartes revenue beat the Street’s $65.7 million and its Adj. EBITDA arrived in line with consensus of $22.3 million, the company’s Adj. EBTIDA margin declined to 32.9 per cent compared to 2018’s Q2 of 34.8 per cent, which he attributes to lower profitability on the company’s MacroPoint business.

“We are forecasting 14 per cent revenue growth and 14 per cent Adj. EBITDA growth in FY19. We decreased our revenue forecast slightly due to the baseline guidance for Q2 being only slightly higher than previous baseline guidance for Q1. Our FY19 forecast is for revenue of $271.4M (previously $276.1M) and Adj. EBITDA of $92.2M (previously $95.9M),” says the analyst in a research update to clients on Thursday.

Sangha says that the long-term outlook for Descartes continues to be positive, with key growth drivers found in the following: increasing global security and trade-related regulatory compliance; growth in e-commerce and omni-channel retail; increasing demand for trade related content; and data monetization.

The analyst believes that Descartes’ current share price already reflects the positive results obtained over Q1. Sangha’s new target price of $33.00 (was $32.50) represents a 24.0x EV/EBITDA multiple of his FY20 estimates and establishes a projected return of 5.1 per cent at the time of publication. The analyst says Descartes is currently trading at 26.1x EV/EBITDA of consensus CY18 estimates, which compares to its supply chain industry peers currently trading at 23.9x EV/EBITDA of consensus CY18 estimates.

“We believe Descartes’ high valuation is justified by its industry leading EBITDA margins and strong revenue visibility. We rate Descartes with a Moderate Risk, due to its long-term growth potential, healthy positive cash flow, and highly visible revenue streams,” he says.

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