Things are looking up for Absolute Software, Paradigm Capital says

After reviewing the latest quarterly results from Absolute Software (Absolute Software Stock Quote, Chart, News TSX:ABT), Paradigm Capital analyst Kevin Krishnaratne has upped his target price in a report on Tuesday, now reaffirming a “Buy” rating with a price target of C$11.00 (previously C$10.00).

Vancouver-based endpoint security and data risk management company Absolute Software reported its fiscal 2020 second quarter on Monday, showing Q2 revenue up six per cent year-over-year to $25.8 million and adjusted EBITDA of $6.2 million, representing a 24-per-cent margin. (All figures in US dollars except where noted otherwise.)

On the quarter, CEO Christy Wyatt said ABT showed strong profitability across the business, while hitting a milestone in passing $100 million in the company’s Commercial Annual Contract Value (ACV) base, representing an increase of five per cent over the prior year balance.

“Our unique firmware-embedded position means we have roots into the most trusted part of the endpoint device, enabling us to be the most trusted partner for our customers. This led to us to adding five new Fortune 500 customers and driving notable customer expansions and wins with Mercy Health, State of Louisiana, and Hamilton Health Sciences,” wrote Wyatt in a press release.

Looking ahead, management said its guidance for fiscal 2020 is unchanged, calling for revenue between $103 and $106 million, representing between four and seven per cent annual growth, with adjusted EBITDA margins expected to come in between 18 and 22 per cent. Cash from operating activities is estimated at between 16 and 22 per cent of revenue and capital expenditures for the year are expected to be between $3.5 and $4.0-million.

Krishnaratne called the quarter’s top-line trends to be in line with his forecast, with continued positive momentum in ABT’s Enterprise segment while Education came in softer than expected. Margins were strong with the $6.2 million in EBITDA coming out ahead of the analyst’s $5.0-million estimate.

“Management is shifting sales and R&D toward higher growth Enterprise markets, which together with a temporary disruption in purchase behaviour from a large client weighed on results. Absolute believes the client issue in Education has been resolved,” said Krishnaratne.

“We focus more on the continued strength in Enterprise, which is a higher growth market, and which now accounts for 57 per cent of the ACV base. We look forward to adoption of new products such as Application Persistence that can drive ACV higher given they require subscription to Absolute’s highest tier plans,” he wrote.

The analyst figures ABT is trading at 2.2x his fiscal 2021 Sales and 10.0x his fiscal 2021 EBITDA estimates, which he sees as “well below” its peers.

“While our target multiple continues to reflect a discount to Information Security comps trading at 7.0x and Canadian Software comps at 4.0x given the higher growth profiles of most companies in these peer groups, the potential for further multiple expansion exists, in our view, if ABT is able to post achieve top-line growth into the double digits on a consolidated level,” wrote Krishnaratne.

The analyst’s new target of C$11.00 represented at press time a projected 12-month return including dividend of 15.5 per cent.