Paradigm Capital raises price target on Absolute Software

On February 4, Absolute reported its Q2, 2019 results. The company earned (All figures USD) $1.76-million on revenue of 24.4-million, a topline that was five per cent better than the same period last year.

“I am very pleased to have joined Absolute at such an exciting time for the company as well as in the broader end point security market,” ABT CEO Christy Wyatt said. “End point resilience is an enterprise requirement that Absolute is uniquely positioned to address together with our strategic OEM [original equipment manufacturing] partners. Our platform enables our unique resilience and intelligence capabilities that span across vendors and platforms to hundreds of millions of devices. These capabilities position us well for continued innovation to deliver against this critical customer need through focused execution.”

Krishnaratne says he saw some positive things in this report and generally sees trends moving in the right direction.

“Absolute’s Q2 was in line on revenue (+5% y/y), while margins beat at +18% versus our estimate of 14%, helped by efficiencies in sales and R&D. Guidance for 2019 was updated to reflect improving margin trend, with outlook now calling for a margin of 16–19% (prior 14–17%),” the analyst notes. “Absolute continues to see momentum in the Enterprise segment helped by strength in target markets such as Healthcare, Professional Services, and Financial Services. Government ACV spending was up 17% y/y, while Education saw its first sequential increase in ACV (+1%) in eight quarters. Absolute won a large contract with one of the biggest K-12 school districts in the U.S. (existing customer) which materially expanded ACV in this particular account (5–6x). Absolute is showing signs of a path toward double-digit top-line growth with a margin profile moving toward 20%.”

In a research update to clients Tuesday, Krishnaratne maintained his “Hold” rating, but raised his one-year price target on Absolute Software from $8.00 to $8.50, implying a return of 7.2 per cent at the time of publication, including dividend.

The analyst thinks ABT will post EBITDA of $17.8-million on revenue of $98.1-million in fiscal 2019. He expects those numbers will improve to EBITDA of $20.6-million on a topline of $104.9-million the following year.

“Our new C$8.50 target (was C$8.00) reflects an EV/Sales multiple on CY20 estimates of ~2.0x (was ~2.0x on FY20), which is a discount to other Information Security comparables (4.3x) and Canadian Software peers (5.2x). 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 adds.