Paradigm Capital trims target on Kinaxis, maintains “Buy”

Paradigm Capital analyst Kevin Krishnaratne likes the look of supply chain management software company Kinaxis (Kinaxis Stock Quote, Chart TSX:KXS) after its first quarter earnings came in with a bottom line beat.

In an update to clients Monday, the analyst dropped his 12-month target from C$100.00 to C$95.00 while maintaining his “Buy” rating.

Ottawa-based Kinaxis delivered its Q1 ended March 31, 2019, on Friday, coming in with revenue of $45.8 million, a 24-per-cent year-over-year increase which was on par with Krishnaratne’s forecast, to go along with Adjusted EBITDA up 29 per cent to $16.0 million and above the analyst’s forecast. (All figures in US dollars unless noted otherwise.)

Krishnaratne says that his takeaways from the quarter and management’s commentary were the 30-per-cent quarter-over-quarter and 60-per-cent year-over-year increase in unsolicited inbounds as well as management’s decision to increase sales and marketing to capitalize on the wide opportunity that the analyst sees in front of the company, a strategy with which he agrees.

“Despite an already impressive +30-year history, we believe the best is yet to come as Kinaxis starts to drive larger and more complex RapidResponse deployments via the Partner channel, leveraging some of the world’s largest system integrators such as Accenture and Deloitte,” says Krishnaratne.

The analyst points to management guidance on on-premise sales, which are expected to move from $8.4 million in 2018 to $22 to $24 million in 2019 before decreasing to $11 to $12 million in 2021 and to about $8.4 million in 2022. Krishnaratne says that the lumpiness in the segment plus lower projections for 2019’s SaaS revenue are the cause of a lowering of his revenue estimates.

Krishnaratne is now calling for fiscal 2019 revenue and Adjusted EBITDA of $187.5 million (previously $187.7 million) and $136.3 million (previously $132.0 million), respectively, and fiscal 2020 revenue and Adjusted EBITDA of $209.4 million (previously $216.3 million) and $148.7 million (previously $152.5 million), respectively.

The analyst’s lowered target of C$95.00 comes from his updated forecast and a slight lowering of his multiple on 2020 from 8.3x to 8.0x (which is still at a discount to KXS’s peers at 9.0x, he says) and represented a projected return of 24.8 per cent at the time of publication.