A move to the cloud could pay off for Altus Group (Altus Group Stock Quote, Chart TSX:AIF) but it also opens up certain risks, says National Bank Financial analyst Richard Tse.
On Wednesday, Altus hosted an investor call to discuss a change in its Altus Analytics division. The company says it will embrace a full cloud offering, a decision that does not surprise Tse.
“Those following Altus will know AA has been in transition for the past year with the Company making meaningful investments into technology – in our view, it was already laying the foundation for the shift to Cloud and the potential valuation re-rating benefits that come with it,” the analyst says. “No doubt a shift to Cloud comes with much potential. Yet, it’s important to note that the timeline is 5-years out and as such, it comes with incremental execution risk. In the interim, we continue to use a sum-of-the-parts valuation model to derive our target price.”
In a research update to clients today, Tse maintained his “Outperform” rating and $35.00 one-year price target on Altus Group, implying a return of 14 per cent at the time of publication.
Tse thinks AIF will post EBITDA of $78.1-million on revenue of $561.1-million in fiscal 2019. He expects those numbers will improve to EBITDA of $89.9-million on a topline of $611.0-milion the following year.
“Based on our math, in order to achieve the target of $400 mln Analytics revenue by 2023 while maintaining recurring revenue at above 90% of total, the recurring revenue stream needs a much faster growth rate (26%-32%) in order to compensate the declines in non-recurring stream while achieving the 17% CAGR implied in the target,” the analyst adds.