Laurentian Bank raises price target on Descartes Systems

Laurentian Bank Securities analyst Nick Agostino delivered a equity research report to clients on Thursday where he reasserted his “Buy” rating for Canadian SaaS logistics company Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News, Analysts, Financials TSX:DSG) while raising his target from $67.00 to $71.00 per share. Agostino said a Brexit-related regulatory environment along with the reopening of economies post-pandemic will continue to serve as tailwinds for Descartes well into 2022.

Waterloo-based Descartes is a global provider of on-demand software-as-a-service solutions for logistics-intensive businesses, where its offerings help businesses to optimize and automate processes such as planning, routing, scheduling and tracking of deliveries, order tracking, invoicing, auditing, payment and filing of customs and security documents for cross-border trade.

Descartes released its fiscal first quarter 2022 financials on Wednesday for the three-month period ended April 30, 2021. The company saw revenues climb 18 per cent year-over-year and up six per cent sequentially to $98.8 million, with the breakdown being $88.3 million in services revenues, professional services and other revenues at $9.2 million and license revenues of $1.3 million. Adjusted EBITDA for the quarter was up 26 per cent year-over-year and up eight per cent sequentially to $41.5 million. (All figures in US dollars.)

Descartes made a couple of recent acquisitions, first in February with QuestaWeb, a foreign trade zone and customs compliance business, for $35.9 million and then in May with Portrix Logistics Software GmbH for $25.1 million.

“Our customers face complex multi-party, multi-process supply chain and logistics challenges. This is even more so in recent times where our customers have faced rapid changes in supply, demand and trade regulations,” said CEO Edward J. Ryan in a press release.

“Our Global Logistics Network is designed for these complex scenarios, helping shippers, carriers, customs authorities and logistics services providers connect and collaborate to execute the full lifecycle of shipments. We continue to innovate to help our customers prepare for tomorrow’s challenges, and we continue to add more solutions and trading partners to our network. As a result, our customers have trusted us with more of their business,” Ryan said.

Descartes’ share price has seen solid growth for well over a decade, and 2020 was no different, delivering a return of 37 per cent. So far, 2021 has been more muted, but the stock is nonetheless up five per cent.

But Agostino sees more upside from here, with his new $71.00 target representing at press time a projected 12-month return of 21.3 per cent.

DSG’s top and bottom lines were beats of both Agostino’s and the consensus estimates. The $98.8 million in revenue was better than Agostino’s call for $94.3 million and the Street’s $93.1 million, while DSG’s $41.1 million in adjusted EBITDA was also better than the analyst’s $38.9 million and the consensus $38.3 million.

Agostino noted that revenue tailwinds came from step-function growth from Brexit-related filings and customs business, better-than-expected contributions from recent acquisitions including revenue synergies and improvements in shipping volumes with the reopening of economies, particularly in the US.

“We note, unlike prior quarters, organic growth was the main revenue driver in FQ1,” Agostino wrote. “With strong M&A contributions ahead of our $4.1 million estimate, we speculate organic growth in the ten to 11 per cent range, ahead of our 7.8 per cent estimate and markedly above DSG’s historical four to six per cent range (we note DSG has been trending above this rate in recent quarters and expects the same for FQ2).”

Agostino said management reiterated its intent to keep up with its M&A program, looking to add complementary services, products and customers, with Descartes paying about 4x sales on average for “quality, well-positioned, high growth assets,” the analyst said.

“We come away pleased with organic growth being the primary driver of record revenues in FQ1, and believe we are now at a stage where we can begin looking at F2022 in a post-COVID era in which DSG should thrive, as highlighted by the quarter’s results,” he wrote.

“As conditions normalize in F2023, we believe opex savings, revenue stickiness and strong acquisitive contributions should put the company in an even better financial footing versus pre-pandemic levels,” Agostino said.

On its balance sheet, Agostino said DSG ended the quarter with $138.1 million in cash and about $350 million of an unused credit facility available and a further $150 million accordion credit facility. The analyst said while the market continues to be highly competitive with elevated multiples for quality assets, DSG remains on the hunt for well-positioned, growing assets. Agostino also noted management’s guidance move where it elevated its EBITDA margin from 35-40 per cent to a target of 38-43 per cent for the rest of fiscal 2022.

The analyst is calling for DSG to generate full fiscal 2022 sales and EBITDA of $407.3 million and $171.2 million, respectively, and fiscal 2023 sales and EBITDA of $459.8 million and $196.3 million, respectively.

“Our increased target price reflects higher estimates for F2022 and F2023. DSG currently trades at 27.6x NTM EBITDA versus supply chain/logistics peers at 32.2x and software consolidators at 15.3x,” Agostino wrote.