Descartes Systems’ Q3 meets expectations at Laurentian Bank

The latest quarterly results from Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News TSX:DSG) came out just as planned but the stock is still too expensive compared to its peers, says Laurentian Bank Securities analyst Nick Agostino.

The analyst reviewed DSG’s fiscal third quarter in a client update on Thursday and maintained both his “Hold” rating and $38.00 per share target price.

Waterloo, Ontario-headquartered SaaS logistics company Descartes Systems released its Q3 2020 financials on Wednesday, showing revenues up 19 per cent year-over-year to $83.0 million and up three per cent from the previous quarter.

Adjusted EBITDA was up 31 per cent year-over-year to $31.5 million and up four per cent sequentially. DSG’s EBITDA margin grew to 38 per cent from 34 per cent a year earlier. (All figures in US dollars.)

“Descartes continues to deliver predictable results in an increasingly unpredictable business environment,” said CEO Edward J. Ryan in a press release. “Our customers need access to timely, reliable data from multiple sources via a network to fuel decision-making tools that power their businesses. The Global Logistics Network (GLN) does just that, connecting shippers, carriers and logistics service providers on one platform to manage the lifecycle of shipments.”

Both top and bottom lines were in line with Agostino’s estimates at $83.2 million and $31.8 million, respectively, as well as the consensus forecasts at $83.0 million and $31.2 million, respectively.

Drilling down, Agostino points to better results from DSG’s Professional Services revenue at $8.9 million (Agostino was calling for $7.9 million). Services revenue of $72.6 million came in as expected while organic growth came in at the high end of expectations at 5.9 per cent versus Agostino’s range of four to six per cent.

With net cash at quarter’s end of $16 million including CFO of $27.5 million and with $340 million available on its credit line, Descartes is slowly rebuilding its cash position, said Agostino, and giving itself the opportunity to keep up its M&A strategy.

“While large deals are available, DSG is opting to stay away from PE competitive bidding situations, continuing to focus on more favourable smaller transactions. The law of numbers suggests this rate needs to accelerate beyond the current 4-5 deals p.a. to maintain the current 15 per cent sales growth, else we may begin to trend toward the lower end of DSG’s 10-15 per cent growth target,” he said.

On valuation, Agostino says that DSG is currently trading at 27.8x NTM EBITDA, which is at the upper end of its four-year trading range of 21x to 28x and above its supply chain and logistics peers at 21.0x (including outliers) and its software consolidator peers at 15.2x.

The analyst noted that on the earnings call management maintained its EBITDA margin outlook of 35 to 40 per cent.

“Global trade winds continue to foster an active business market for DSG denoted by healthy transaction activity, growing demand for global trade data and customs/regulatory data, and a thriving ecommerce/omni-channel market. This level of activity provides strong predictability for DSG’s business outlook, which is reflected in their financial performance consistency,” said Agostino.

The analyst is calling for full fiscal year 2020 sales and EBITDA of $326.1 million and $122.4 million, respectively. His $38.00 per share target represented a projected return of negative 10.7 per cent at the time of publication.