Kinaxis gets “Buy” rating from PI analyst Gus Papageorgiou

PI Financial kicked off coverage of SaaS for supply chain management company Kinaxis (Kinaxis Stock Quote, Chart, News TSX:KXS) on Wednesday with a “Buy” rating and C$92.00 target price.

Analyst Gus Papageorgiou said a growing market combined with the company’s impressive customer base give Kinaxis a strong competitive position in the field.

Ottawa-based Kinaxis has grown its revenue from $70.1 million in 2014 to $150.7 million by 2018, gaining customers for its SaaS platform Rapid Response and moving beyond its original verticals of tech and pharmaceuticals. So far, the company has snagged contracts from names such as Cisco, Qualcomm, Honda, Toyota, Ford, Nissan, Procter & Gamble, Unilever, Novartis, Flex, Jabil, Celextica and Dyson.

“KXS’s RapidResponse solution allows customers to save on inventory, make faster and better decisions, lower headcount and improve customer delivery times. The feedback we have received from the customers we spoke to is universally positive,” wrote Papageorgiou in his coverage initiation.

The analyst says German multinational software company SAP is Kinaxis’ biggest competitor, although he believes that SAP’s platform is still “well behind” RapidResponse and that SAP’s model is “only appropriate for a minority of the market.”

Papageorgiou points to what he sees as the company’s strong balance sheet and cash flow, where KXS maintains a net cash position of $200.8 million and has been cash flow positive since its IPO in 2014. Profit margins have been consistently strong, as well, maintaining EBIT margins above 20 per cent since its IPO.

“The company has recently undertaken a heavy investment phase in building out its sales channels in Europe and is now pursuing a similar effort in Asia. In addition it has been investing heavily in its solution and should reveal its next generation offering this month. This lowered EBIT margins from 31 per cent in 2015 to 21 per cent in 2018,” writes Papageorgiou.

The analyst says KXS actually has too much cash, enough that it’s weighing down the company’s return on equity and return on assets. In fact, Papageorgiou says that it’s “not obvious” why Kinaxis doesn’t pay a dividend.

While 2018 was a rougher year, numbers-wise, for KXS as the company began investing more heavily in growing its European sales teams, 2019 has seen better overall performance, says Papageorgiou, with the company showing revenue up 16 per cent year-to-date.

“Overall, we are seeing the subscription based revenue growing strongly. Profitability has been quite strong year to date but there we expect it to decline as the Company hires more people in Asia to bolster its sales and marketing efforts in that region,” he writes.

Looking ahead, Papageorgiou thinks KXS will deliver revenue and EBITDA in fiscal 2019 of $185.4 million and $50.9 million, respectively, and revenue and EBITDA in fiscal 2020 of $209.0 million and $58.0 million, respectively.

The analyst’s C$92.00 target price represented a projected return of 13.9 per cent at the time of publication. (All figures in US dollars unless where noted otherwise.)

Kinaxis latest quarterly report came on August 1 when its second quarter ended June 30 featured revenue up nine per cent year-over-year to $42.4 million and adjusted EBITDA up five per cent year-over-year to $11.6 million. Year-to-date, KXS’s share price is up 27 per cent.