Accelerating growth is in the cards for Kinaxis, says National Bank

National Bank of Canada analyst Richard Tse remains captivated by Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS), maintaining an “Outperform” rating and target price of C$225/share for a projected return of 14.7 per cent in an update to clients on Friday.

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 platform RapidResponse which provides end-to-end visibility, planning, and coordination of supply chain networks.

Tse’s latest analysis comes after Kinaxis reported its third quarter financial results, which he noted to be in line with National Bank expectations.

“Kinaxis reported solid FQ3 results with a record number of new customers wins,” Tse said. “It’s that growing momentum combined with a strong upcoming renewal cycle that had the Company increasing its F21 guidance and reiterating its forecast of returning to 23 to 25 per cent SaaS growth in F22.”

The company’s quarterly financials were headlined by $64.4 million in revenue (all report figures in US dollars except where noted otherwise), right on the money with the National Bank estimate while beating the consensus projection of $63 million. Meanwhile, the company reported EBITDA of $12.4 million, significantly outpacing the consensus estimate of $7.9 million, as well as the National Bank projection of $8.6 million.

Tse notes that the company’s strong EBITDA came from a higher than expected gross margin (66 per cent versus the National Bank projection of 64 per cent), and lower operating expenses on account of the ongoing pandemic and the subsequent absence of travel costs and other similar items.

Tse is also a proponent of the idea that the company’s valuation does not completely value a normalized financial run rate going forward, having benefited from supply chain issues for other companies.

“For those following this name, you’ll know the broad supply chain challenges have fueled momentum in this market. In the case of Kinaxis, that plays right into its core product, RapidResponse,” Tse said. “To the company’s credit, it facilitated its position in the market with what we’ve characterized as a triage (quick) deployment of its platform via RapidStart, and it’s been our view that as those deployments convert into full RapidResponse engagements, we’ll see a step function in growth.”

According to Tse, a strong sign that the company is in a positive position is the fact that it ended the quarter with ARR of $207 million, a four per cent sequential improvement and 23 per cent year-over-year growth, as he notes that ARR eliminates any volatility in the business’s renewals under different key performance indicators.

“We won a record number of new customers this quarter, and year-to-date we have more than tripled new customer wins compared to the same time last year. That success is reflected in very strong year-over-year growth in our annual recurring revenue and a slightly improved outlook for 2021,” said John Sicard, President and CEO of Kinaxis in the company’s November 4 press release. “Supply chain issues continue to be at the centre of boardroom conversations and daily news feeds, and we are helping companies navigate the complexities. The sustained, positive momentum in our market gives us confidence in our mid-term target of 23 to 25 per cent growth in SaaS revenue, including for next year.”

The new reports have prompted slight revisions to Tse’s financial projections for Kinaxis, as he now forecasts slight improvements to both the company’s revenue ($67.8 million vs. $67.1 million) and EBITDA ($9.9 million vs. $9.7 million) for the fourth quarter of 2021, leading to revisions for the full 2021 fiscal year in both categories as well, as he now projects $250 million in revenue (previously $249.2 million) and $38.5 million in EBITDA.

Looking ahead to 2022, Tse has also made slight modifications to his forecasts, bumping revenue up minimally to a projected $317.7 million (previously $317.6 million), while he now projects the EBITDA to be $65.9 million instead of the original $63.3 million estimate.

Tse also projects the final 2021 figures to show drops in adjusted EPS ($0.60/share from the $1.11/share reported in 2020), cash flow from operations ($11 million from $59 million), and free cash flow (a $20.5 million loss compared to the $45 million positive reported in 2020), though he expects each category to rebound in a big way in 2022, projecting adjusted EPS of $1.51/share, $86 million in cash flow from operations, and $74.4 million in free cash flow. 

The only valuation multiple Tse features in his analysis is the EV/Sales, which he projects to drop from the reported 18.8x in 2020 to 16.8x in 2021, then to a projected 13.3x in 2022.

Kinaxis’ stock price has experienced positive momentum over the last month with 9.1 per cent overall growth, contributing to the 12.4 per cent growth rate for the year to date as it climbs closer to its high point of $205.63/share on September 1.