The stock may have had its ups and downs this year but National Bank Financial analyst Richard Tse is staying bullish on Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS). In an update to clients on September 26, Tse maintained his “Outperform” rating and target price of $225/share for a projected return of 16.6 per cent at the time of publication.
Headquartered in Ottawa with satellite and virtual offices in Chicago, Tokyo, Hong Kong and Eindhoven, Kinaxis has been around since 1984, and is a supplier of cloud-based subscription software, RapidResponse, which provides end-to-end visibility, planning and coordination of supply chain networks.
Tse’s latest analysis comes after National Bank and Kinaxis’ new Chief Financial Officer, Blaine Fitzgerald, held investor meetings.
“Overall, we came away from our meetings increasingly confident in the growth runway for this name,” Tse said. “That confidence comes from the structural market tailwind for supply chain solutions combined with tactical measures taken by the company (like RapidStart) that’s maintaining and potentially increasing Kinaxis’s competitive position.”
Based on the dialogue with Fitzgerald, Tse believes Kinaxis is in a strong position to pursue an aggressive growth strategy, believing the company to be well-positioned for a supply chain tailwind to send its sales skyward on account of a 40 per cent increase in its pipeline over the last year and perceived underinvestment in mid-market enterprises from a supply chain perspective.
Tse also notes the positioning of the company’s RapidStart software as an opportunity to upsell companies to get more uptake on its RapidResponse software with more available features, with Tse noting the company’s belief that it has an addressable market size of $10.5 billion based on its expansion to 7,000 clients from its previous benchmark of 3,000.
Finally, Tse also believes the company is in a position to be aggressive with acquisitions, with the recent acquisitions of India-based service firm Prana and Toronto-based AI solution provider Rubikloud marking a shift from its largely organic growth patterns, with Tse believing the company has roughly $253 million in liquidity to pursue further acquisitions at a modest 0.6x leverage ratio.
The company’s most recent financial reports were released on August 5 to address its second quarter of 2021, headlined by a jump of 18 per cent year-over-year in its SaaS business to $42.3 million (all report figures in US dollars), though the company’s EBITDA margin dropped to 12 per cent compared to 37 per cent in the same quarter of 2020.
“After three consecutive quarters of strong business momentum, I’m confident that the market has returned to a very healthy growth environment. With all the well-known disruptions that supply chains have endured over the past year, we are seeing a heightened level of interest in the hyper-agility that only Kinaxis can bring to the planning process,” said John Sicard, President and CEO of Kinaxis in a press release.
“Compared to the first half of last year, we have won over twice the number of new customers, and our annual recurring revenue is 24 per cent higher than a year ago. We believe that these are excellent indicators of the positive trends in our business and give us even greater confidence in our expectation of a return to higher SaaS revenue growth next year,” said Sicard.
Since the release of the results, Kinaxis has remained busy, announcing a partnership with Exelixis, an oncology-focused biotechnology headquartered in California’s Bay Area, to leverage RapidStart to evolve its global supply chain planning capabilities.
Tse’s financial projections show Kinaxis headed in the right direction, as he projects revenue of $249.2 million for 2021, marking a potential 10.7 per cent year-over-year increase from the reported $225.2 million in revenue generated in 2020, followed by a jump to a projected $317.6 million in 2023, which would be a 27.4 per cent year-over-year increase if current projections hold.
Meanwhile, Tse projects the company’s EBITDA to take a dip to $34.6 million in 2021 for a 13.9 per cent margin after reaching $53.7 million with a 23.8 per cent margin in 2020, though he expects a rebound to a projected $63.3 million with a 19.9 per cent margin in 2022.
Tse’s projections for cash flow from operations follows a similar trend, dipping to a projected $34 million in 2021 from the reported $59 million in 2020, with an anticipated rebound to $88 million in 2022.
On EV/Sales, Tse has forecasted a drop from 18.1x in 2020 to 16.3x in 2021, then to a projected 12.8x in 2022.
Overall, Tse believes the company may have some aggressive targets in mind as it continues its expansion.
“Our read on the body language from the virtual meetings suggests the target SaaS growth rate in the mid-20s could be conservative as the company targets approximately $1 billion in revenue within the next five years,” Tse said.
Overall, Kinaxis’ stock price has been fairly steady throughout 2021 with a 0.8 per cent return for the year, having recently reached its high point of $205.63/share on September 1.