Haywood upgrades Descartes Systems Group to a “Buy”

Ahead of Descartes Systems Group’s (Quote, Chart TSX:DSG, NASDAQ:DSGX) fiscal second quarter results, analyst Pardeep Sangha of Haywood Securities has changed his recommendation from “Hold” to “Buy” and raised his target price from $33.00 to $37.50. (All figures in US dollars.)

In a note to clients on Tuesday, Sangha gives two reasons for his target raise: an expectation of strong quarterly results (due on September 5) along with an increase in his forecasts as a result of Descartes’ recent acquisitions of air carrier parcel scanning and tracking company Velocity Mail and real-time location data company PinPoint.

“We like Descartes as a long-term investment opportunity because the Company has high EBITDA margins, high recurring revenue, predictable cash flows, strong balance sheet, experienced management team and a track record of delivering consistently solid results,” says Sangha. “Management has followed a disciplined acquisition strategy that has resulted in a healthy share price appreciation over the past ten years.”

The analyst sees 16 per cent revenue growth for Descartes in fiscal 2019 and 11 per cent revenue growth in fiscal 2020.

“We are forecasting Q2 revenue of $68.2 million with Adj. EBITDA of $23.3 million, compared to consensus revenue forecast of $67.7 million with Adj. EBITDA of $23.0 million. We increased our Q2 forecast due to the contribution of five weeks of revenue in the quarter from the Velcoity Mail acquisition, which was not originally included in the Company’s baseline guidance,” says Sangha.

Along with the Q2 results, the analyst says that catalysts for Descartes going forward include: integration of Velocity Mail and PinPoint; additional synergistic acquisitions in fiscal 2019; and improving EBITDA margins in fiscal 2020.

Sangha’s $37.50 target price represents a projected 12-month return of ten per cent at the time of publication.