Laurentian Bank Securities analyst Nick Agostino is staying bullish on supply chain management company Kinaxis (Kinaxis Stock Quote, Chart, News TSX:KXS) after news broke that Honda had selected Kinaxis to manage its automotive supply chain.
In an update to clients on Friday, Agostino reiterated his “Buy” rating and $100.00 target price for KXS, representing a projected one-year return of 25 per cent at the time of publication.
Shares of Kinaxis were up on Friday as the Ottawa-based SaaS company announced its further penetration into the auto market with the Honda win.
Honda is the 7th largest auto manufacturer globally with 215,000 employees and US$143 billion in sales last year. The result is that now Kinaxis has contracts with five of the top ten auto companies, including Toyota, Ford, Nissan and Volvo.
“The pace of innovation makes it an exciting but challenging time for the automotive industry. From increased personalization in product features to emerging technologies like autonomous driving, the industry needs to adopt more sophisticated supply chain practices to manage for success,” said John Sicard, CEO of Kinaxis, in a press release. “We are proud of the opportunity to work with Honda to provide a true end-to-end view of their network and to foster faster decision-making and better supply chain management.”
The announcement comes on the heels of Kinaxis’ announcement earlier this week that Teva Pharmaceuticals had chosen KXS for its supply chain network, as well. Both Teva and Honda were signed over the second quarter of this year, it should be noted, so the contracts have already been included in the company’s backlog of US$247.2 million.
Kinaxis Honda deal is just for car giant’s operations in Japan, for now…
Agostino points out that the Honda deal is currently just for the car giant’s operations in Japan, where Japan’s sales represent less than 25 per cent of the company’s global total.
But it’s a case of land and expand, says Agostino.
“The win not only adds to KXS’s penetration in the automotive market with KXS now having contracts with five of the top ten manufacturers but adds to its Asian presence and helps justify ongoing efforts within the last 20 months to bolster its sales presence and build out data centres within that region,” writes Agostino.
“We believe with time, Honda has the potential to be a >US$1M/qtr. customer for KXS. While KXS spoke of contract signing delays post Q1, similar to Q3/18, with the Teva announcement and now Honda, we are seeing confirmation that KXS has been successful in signing its pipeline opportunities,” he writes.
The analyst’s valuation of KXS is based on a 9x multiple of his 2019/2020 sales estimates, with Agostino figuring that the stock currently trades at 7.2x his NTM EV/Sales, which compares to the company’s technology high-fliers group (those with sales growth plus EBITDA margin above 50 per cent) at 6.5x.
“Since its IPO KXS has traded at an upwards 2x premium to this group reflecting its disruptive technology. Continued contract announcements in the near-term could aid in restoring the full premium, in our view; Teva, Honda, who’s next?” Agostino says.
Shares of Kinaxis closed up 4.6 per cent on Friday to $82.80, leaving the stock up 25.6 per cent for the year.
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