VersaPay gets a price target cut from PI Financial

Cloud-based invoice company VersaPay (VersaPay Stock Quote, Chart, News TSXV:VPY) did well over its latest quarter but analyst David Kwan of PI Financial is giving the stock a target cut, nonetheless, based on lowered estimates and a forecasted share dilution.

In a update to clients on Wednesday, Kwan called VersaPay’s third quarter results solid, saying subscription revenue for the company’s SaaS product ARC should double over the upcoming year.

Toronto-based VersaPay released its Q3 ended September 30 financials on Tuesday, where the company achieved a record $125 million in annual recurring revenue in new sales.

“This raises our subscription backlog to $1.57 million and our annual recurring revenue including subscription backlog to over $9.38 million,” said CEO Craig O’Neill in a press release. “Total ARC-related revenues grew 161 per cent year-over-year to $1.80 million, while overall revenue increased 90 per cent year-over-year to $2.23 million. As ARCTM contributes a growing share of our overall revenue, our gross margins continue to climb, growing to 83 per cent this quarter, up from 76 per cent in Q3 2018.”

VersaPay’s share price has been trending lower over the past few months but the market seems to have agreed with the quarterly numbers, as the stock is up almost 15 per cent since the release.

Kwan rates the Q3 as having a “slightly positive” impact, saying that VPY’s $2.2 million in revenue (up 96 per cent year-over-year) were in line with his $2.3-million estimate and the consensus $2.4 million. An adjusted EBITDA loss of $1.8 million was better than Kwan’s negative $2.1 million forecast as well as the consensus $2.2 million.

VersaPay ended the quarter with $4.9 million in cash compared to $6.6 million at the end of the Q2 and with $11.1 million in capitalized leases. Kwan noted that the company’s operational cash burn was lowered from $0.66 million per month last quarter to $0.58 million.

At the same time, the analyst says that the company likely needs more capital and will need to raise at least $5 million by February 28, 2020, to access the recently closed $4-million credit facility. Thus, Kwan is forecasting a $5-million equity raise during the Q1 2020, which results in the share dilution.

With the update, Kwan is reiterating his “Buy” recommendation with the lowered target of $2.25 per share (was $3.00 per share).

“Our target price is based on our DCF valuation, with the reduction related to the decrease in our estimates as well as the dilution from a $5-million equity raise were are forecasting next quarter,” Kwan wrote.

“Despite our more conservative forecasts, we are still expecting ARC subscription revenues to nearly double next year, with potential (material) upside should contributions from its key partners (Mastercard and RBC in particular) materialize quicker than expected. Upside in the near-term could be limited until there is more clarity around an expected ($5 million) capital raise but we believe the stock remains attractively valued,” he says.

Kwan is forecasting fiscal 2019 revenue of $8.8 million (was $9.3 million) and adjusted EBITDA of negative $8.2 million (was negative $8.4 million). For fiscal 2020, he is calling for revenue of $13.8 million (was $17.2 million) and adjusted EBITDA of negative $5.1 million (was negative $2.5 million).

At press time, Kwan’s $2.25 target represented a projected return of 40.6 per cent.