Echelon Wealth Partners analyst Gianluca Tucci likes the new deal between IT solutions company Pivot Technology Solutions (Pivot Technology Solutions Stock Quote, Chart, News TSX:PTG) and US chip-maker Intel (Intel Stock Quote, Chart, News NASDAQ:INTC).
The analyst says the sale of Pivot’s Smart Edge software business to Intel crystallizes value creation for Pivot.
In an update to clients on Tuesday, Tucci maintained his “Buy” rating with the raised target price of C$3.30 per share (previously C$2.75 per share).
Toronto-based IT infrastructure company Pivot announced on Tuesday the $27-million deal which will see Pivot’s edge computing software business go to Intel along with 25 employees joining Intel’s Network and Custom Logic Group as well as a three-year preferred channel partner agreement between the two companies which designates Pivot as a non-exclusive preferred systems integrator and channel partner for Smart Edge-based solutions. The deal is expected to close in coming weeks. (All figures in US dollars unless where noted otherwise.)
Intel plans to make a push into equipment for 5G networks and sees the development of its edge computing prowess to be part of that strategy.
“Intel is the right company and brand to advance and scale Smart Edge’s software solution. Our partnership with Intel will leverage Pivot’s core strengths as a technology integrator and service provider with Intel’s advanced technology solutions to drive the adoption of the Smart Edge platform,” said Pivot CEO Kevin Shank in a press release.
Tucci says that the partnership works well for Pivot, which while loading onto Intel the cost of further developing the Smart Edge software, can still resell the software along with design, integrate, support and manage the software solutions, all of which are Pivot’s core competencies, the analyst says.
“We believe the sale and partnership announcement is value-creative and allows for flexibility in strategic alternatives for the use of proceeds, which we believe can include a combination of debt reduction, common dividend increase, special dividend, and/or a niche services acquisition,” writes Tucci.
“For strictly contextual purposes, the $5.1-million net-spend in 2018 on Smart-Edge is more than enough to double 2018’s common dividend spend of $4.8 million. We look for a material one-time EPS gain in Q419 results with an acceleration in services growth as a result of the preferred partnership in 2020 and beyond. We leave our revenue estimates unchanged for now with a slight reduction in SG&A as a result of the lessened expenses and look to fine-tune our 2020+ estimates and valuation after its Q319 earnings call in November,” he writes.
Tucci notes that while it’s obvious that revenue from Pivot’s major customers has been on the decline since the third quarter of 2018, where majors in Q2 of this year represented 23.0 per cent of revenue as compared to 38.0 per cent a year earlier, the company hasn’t lost these majors as customers, while the company has also said that its services pipeline has been growing over the past several quarters. The analyst says that the Intel deal should help with higher margin revenue growth in 2020 and beyond for Pivot.
Tucci is calling for fiscal 2019 revenue and adjusted EBITDA of $1.27 billion and $26 million, respectively, and 2020 revenue and adjusted EBITDA of $1.31 billion and $32 million, respectively.
His C$3.30 target represented a projected 12-month return of 142 per cent at the time of publication.
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