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Expect another strong quarter from Descartes Systems, says Laurentian

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Laurentian Bank Securities analyst Nick Agostino remains bullish about Descartes System Group (Descartes Systems Group Stock Quote, Chart, News, Analysts, Financials TSX:DSG), reiterating his “Buy” rating with a target share price of $79.00/share in an update to clients on September 1.

Founded in 1981 and headquartered in Waterloo, Ont., Descartes System Group is a Canadian multinational technology company specializing in logistics software, supply chain management software and cloud-based services for logistics businesses.

Agostino’s latest analysis comes ahead of Descartes reporting its financial results for the second quarter of 2022 on September 8, which Agostino expects to fall in line with consensus projections. Agostino believes the company will reach nine figures in sales for the quarter, with the projected $100.6 million representing sequential growth of 1.8 per cent, as well as year-over-year growth of 19.8 per cent. (All figures in US dollars.)

“Our $100.6 million estimate includes ~$5.8 million in incremental M&A from a full-quarter contribution from ShipTrack and QuestaWeb, close to a full-quarter contribution from Portrix, three weeks from GreenMile and ~1.5 months incremental from Kontainers,” Agostino wrote in his update. “Our estimate implies ~12.8 per cent organic growth, above the reported pre-COVID range of four to six per cent and in-line with DSG’s 13 per cent baseline growth.” 

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Agostino also expects the company to report EBITDA of $42.3 million, which would make for a 25.1 per cent year-over-year growth and a margin of 42 per cent, which Agostino attributes to the company’s higher-margin subscription revenues and benefits from sticky cost savings.

Descartes has been busy in the second quarter after announcing a $98.8 million/$41.1 million sales/EBITDA split for the first quarter of 2022, headlined by the July acquisition of GreenMile, which provides cloud-based mobile route execution solutions for food, beverage, and broader distribution verticals, for $30 million upfront, with up to an additional $10 million available through performance-based earn-outs, based on GreenMile achieving revenue-based targets over the first two years post-acquisition.

The company’s diversified product offerings have recently been highlighted in a number of press releases depicting various businesses benefitting from DSG’s SaaS offerings. That includes its eCommerce warehouse management system which Descartes said is being used by Switzerland-based beauty vendor haar-shop.ch to increase its warehouse productivity by 40 per cent and by online thrift store platform Goodfair to scale and streamline its fulfillment initiatives. Meanwhile, Descartes has said that air freight service provider Cathay Pacific Cargo uses DSG’s Core Bluetooth Low Energy (BLE) readers, tags and network in its new Ultra Track cargo tracking service.

“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 Edward J. Ryan, Descartes’ CEO in the company’s June 2 press release announcing its first quarter results.

“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.

Agostino expects Descartes to continue its positive momentum through the rest of the 2022 fiscal year, as he projects annual sales of $410.8 million for a 17.8 per cent potential year-over-year increase, with a further projected jump to $470.9 forecasted for 2023, a 14.6 per cent potential year-over-year increase.

The EBITDA projections follow a similar path, with a projected 21.9 per cent year-over-year increase to $172.8 million forecast for 2022 (42 per cent margin), before a forecasted jump to $201.4 million for 2023 to mark a potential 16.6 per cent year-over-year increase and 42.8 per cent margin.

Valuation data also appears to be working in Descartes’ favour according to Laurentian Bank projections, with Agostino forecasting another drop in EV/Sales from the reported 18.7x in 2021 to 15.8x in 2022, followed by another forecasted drop to 13.8x in 2023. The EV/EBITDA forecasts follow a similar downward trend, with Agostino projecting a drop from the reported 45.9x in 2021 to 37.7x in 2022, followed by another projected drop to 32.3x in 2023.

“DSG currently trades at 36.8x NTM EBITDA, above its 4-year trading range of 17-30x, versus supply chain/logistics peers at 38.2x, software consolidators at 17.2x and comparable Wisetech Global at 54.6x,” Agostino said. “Given the ~35 per cent, three-month rise in the shares, we look to revisit our estimates, TP and recommendation post FQ2 results.”

At press time, Agostino’s $79.00 price target represented a projected one-year return of 0.8 per cent. Descartes’ stock price has steadily risen since June and is now up 36.8 per cent for the year to date.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter

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