Absolute Software has 39 per cent upside, Industrial Alliance says

Absolute Software’s (Absolute Software Stock Quote, Chart: TSX:ABT) quarterly financials came out marginally ahead of analyst Blair Abernethy’s expectations, which was enough for the Industrial Alliance Securities CFA to reiterate his “Buy” recommendation and C$10.50 price target for ABT.

Last Friday, Absolute Software reported its fiscal first quarter 2019 financials for the three months ended September 30, 2018. The company produced total revenue of $24.3 million, a six per cent year-over-year increase, and an Adjusted EBITDA of $4.1 million, a 215 per cent uptick from Q1/F19’s $1.3 million. (All figures in US dollars unless noted otherwise.)

Commenting on the release, interim CEO Steve Munford underlined the performance of ABT’s Enterprise and Government sectors of its annual contract value base, which grew year-over-year by 13 per cent and 20 per cent, respectively.

“We are very pleased to have commenced the fiscal year with strong momentum in both the Enterprise and Government market verticals, while at the same time driving meaningful improvements in profitability,” said Munford in a press release. “We are committed to building on this momentum by maintaining our focus on target markets and customers and by leveraging our PC channel relationships, while at the same time optimizing our profitability.”

Abernethy expects a smooth transition from Munford to the company’s newly-anointed CEO Christy Wyatt, prior chief at Dtex Systems and, earlier, Good Technologies. “We see Wyatt’s security software and growth company experience and deep industry relationships as an excellent fit for Absolute’s current stage of development,” says Abernethy in a client update on Monday.

ABT’s revenue of $24.3 million came in above Abernethy’s estimate of $23.7 million and the consensus $24.0 million, while its EBITDA of $4.1 million was well ahead of his and the Street’s $2.8 million estimate.

Abernethy says he expects ABT to continue making solid progress in growing its partnerships and annual contract value base over the next few years, which should lead to multiple expansion for the stock.

“At this point, we expect to continue to value Absolute on a multiple of revenue for another year or so until we see more stable quarterly growth and EBITDA margins,” says Abernethy. “Absolute is currently trading at 2.2x EV/Sales (on F2019E), which we view as attractive relative to its growth potential, recurring revenue base and comparable SaaS multiples, although we expect it will take some more time for investors to regain confidence in the stock.”

“Given the significant product enhancements, completed sales force revamp, and new CEO, we continue to expect an improving sales trajectory through F2019 and F2020,” he says.

Abernethy has slightly adjusted his estimates, now predicting 2019 revenue and EBITDA of $98.4 million (was $98.2 million) and $14.7 million (was $13.5 million), respectively, and 2020 revenue and EBITDA of $108.3 million (was $108.2 million) and $17.3 million (was $16.9 million), respectively.

The analyst’s C$10.50 target represents a projected return of 39.3 per cent at the time of publication.