Laurentian Bank maintains “Hold” rating on Descartes Systems

Even with the recent acquisition of e-commerce company Peoplevox, analyst Nick Agostino of Laurentian Bank says that Canadian tech name Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News TSX:DSG) is more than fully valued.

In a fourth-quarter preview on Tuesday, Agostino maintained his “Hold” rating and $38.00 target.

Logistics SaaS company Descartes announced on Tuesday the purchase of UK-based Peoplevox, a cloud-based e-commerce warehouse management solutions (WMS) business, in a $24.5-million cash transaction paid through DSG’s line of credit.

Peoplevox has an extensive list of clients including more than 40 new ones added in 2019 and has names like RiteAid and Gymshark on its list, with Peoplevox becoming a Shopify Plus WMS Partner as of June 2017. (All figures in US dollars.)

According to Descartes management, the deal strengthens the company’s fulfillment and warehouse management capabilities on its Global Logistics Network.

“Like our investments in Oz, pixi and ShipRush, Peoplevox adds density and domain expertise to what is an increasingly important area of our business – e-commerce,” said Edward Ryan, Descartes’ CEO, in a press release. “We’re thrilled that Peoplevox is joining Descartes to help us better serve businesses looking to enhance their direct-to-consumer fulfilment performance.”

Agostino compares the acquisition to those for Oz, pixi and ShipRush, all acquired in late 2015 and early 2016 for about $10 to $30 million each, with sales estimates in the $8 to $10 million range.

“Given the size of the transaction we estimate similar revenues, implying ~3x sales. We have increased our F2021 and F2022 by US$8M in annualized sales starting mid-February 2020 and assumed a 20-25 per cent EBITDA margin on the transaction,” Agostino wrote.

Ahead of Descartes’ Q4 results due next Wednesday, Agostino is expecting sales, EBITDA and EPS to arrive in-line with consensus estimates of $84.5 million, $32.1 million (37.9 per cent margin) and $0.12 per share, respectively. The revenue expectation would represent a 19-per-cent increase year-over-year, with Agostino calling for full-year 2020 sales guidance of $79.3 million, up 19 per cent from 2019.

“Going forward we expect EBITDA growth to return to mid-teens as IFRS 16 reported results are lapped. Our estimate aligns with EBITDA baseline growth guidance of 29 per cent and FQ2 commentary of 2H high 20s / low 30s growth,” Agostino wrote.

Looking ahead, Agostino is expecting management commentary on a number of items, including growth prospects in key markets, carrier capacity matching demand, the status of Macropoint’s international expansion plans, the financial health of North American Carriers, the status of product expansion and synergies connected to VC and the impact of the coronavirus on DSG’s shipping demand and the overall macro environment.

Agostino says his “Hold” is valuation-based, where he sees DSG currently trading at 28.3x next twelve months EBITDA, which is at the upper end of its four-year trading range of 21-30x and compares to its supply chain and logistics peers at 20.9x (including outliers) and its software consolidator peers at 16.1x.

At press time, Agostino’s $38.00 target represented a projected 12-month return of negative 13.0 per cent.