Take a pass on Absolute Software: Paradigm Capital

Absolute Software’s (TSX:ABT) fiscal fourth quarter posted revenue in-line with expectations along with a consensus beat on EBITDA, an overall positive result, says analyst Kevin Krishnaratne of Paradigm Capital, who nonetheless maintains his “Hold” recommendation and 12-month target price of C$8.00.

Security and tracking software company Absolute reported Q4/18 revenue of $24.1 million, a four per cent year-over-year increase, and an adjusted EBITDA of $3.1 million, representing 13 per cent of revenue. (All figures in US dollars unless noted otherwise.)

Interim CEO Steve Munford said that the quarter showed continued momentum in its Enterprise sales, particularly in the healthcare, financial services and professional services verticals.

“Moving into our new fiscal year, we expect to increase our emphasis on these verticals while leveraging our strong OEM channel relationships to drive new customer acquisition opportunities,” Munford said in a press release on Monday. “Incremental investments in these focus areas will be funded within our existing cost structure, meaning continued operating margin expansion as our top line continues to grow.”

Krishnaratne points to Q4 highlights including recurring revenue up five per cent year-over-year to $22.9 million and the $3.1 million EBITDA, which beat his estimate of $2.5 million as well as the Street’s $2.3 million. The analyst also notes that management guidance for fiscal 2019 arrived slightly under expectations for revenue ($96.0 – $99.0 million, compared to consensus and Krishnaratne’s $100 million) but above expectations for EBITDA margin (13-16 per cent from ABT versus the Street’s 13-16 per cent).

“While we were pleased with Q4 results and the outlook for margin, which was better than forecast, we look forward to consolidated revenue growth trends moving closer to double-digit gains before suggesting investors become more constructive on the stock,” says Krishnaratne.

“Our target reflects an EV/Sales multiple on FY19/FY20 estimates of ~2.0x (unchanged from our prior valuation based on a 2.0x EV/Sales multiple on FY19), which is a discount to other Information Security comparables (4.5x) and Canadian Software peers (6.2x),” says the analyst. “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.”

Krishnaratne’s $8.00 target represents a potential return including dividend of 7.6 per cent at the time of publication.