National Bank Financial raises price target on EXFO

Strong quarterly results are cause for a target raise on EXFO (EXFO Stock Quote, Chart, News NASDAQ:EXFO), says National Bank Financial analyst Richard Tse who reviewed the company’s fiscal third quarter results in an update to clients Wednesday.

EXFO’s share price vaulted ahead on Thursday as the Quebec City-headquartered EXFO, a provider of test, service assurance and analytics products for communications service providers (CSPs) and network equipment manufacturers (NEMs), announced on Wednesday its Q3 financials for the period ended May 31, 2020.

EXFO’s sales dropped 10.1 per cent year-over-year to $66.1 million, with the drop chalked up to the impact of the COVID-19 pandemic on business. EBITDA came in at $10.7 million, up from $7.9 million a year earlier. (All figures in US dollars.)

Commenting on EXFO’s performance during the COVID-19 pandemic, CEO Phillippe Morin said in the company’s press release, “We delivered encouraging sales in a difficult environment and proactively implemented cost-controls, while benefiting from a Canadian government wage subsidy program. The end-result was strong earnings amid end-markets that will necessarily improve as long-term drivers like fibre and 5G
deployments remain intact.”

In his report, Tse said the quarterly results were better than expected, where the top line of $66.1 million was better than Tse’s $58.9-million estimate and the consensus $59.5 million and the $10.7-million EBITDA was well ahead of Tse’s $5.0-million estimate and the Street’s $0.4-million. The analyst said EXFO’s strong profitability benefited from cost reductions in SG&A and R&D, along with a government wage subsidy program.

Tse said the results show how strong EXFO’s market continues to be during COVID-19, even as sales cycles have been lengthened, and reflects well on the company’s ability to manage operations during the health crisis. The analyst said the company’s balance sheet currently looks solid, having exited the quarter with a cash balance of $17.0 million ($20.5 million including short-term investments).

“In our opinion, EXFO has the potential to benefit from a valuation re-rating by harvesting incremental communications equipment opportunities, particularly with the pending 5G deployments globally,” Tse wrote.

“That said, there’s uncertainty around the timing of those deployments given COVID-19 and even prior to this pandemic, this was a highly competitive market that has historically put a constraint on operating leverage,” he wrote.

Tse said in light of those uncertainties he is maintaining his “Sector Perform” rating but pushing his target price upwards, with a revised target of $4.00 (was $2.50), which at press time represented a projected 12-month return of 24.0 per cent. The target is based on Tse’s discounted cash flow valuation implying a 7.4x multiple of his fiscal 2021
EV/EBITDA estimate (was 4.8x).

Tse thinks EXFO will generate fiscal 2020 revenue and adjusted EBITDA of $261.7 million and $25.2 million, respectively, which would be down on both counts from fiscal 2019’s $286.9 million and $25.6 million, respectively.

For fiscal 2021, he is calling for $288.0 million in revenue and $29.1 million in EBITDA.

Year-to-date, EXFO’s share price is down 24 per cent.