Kinaxis has a 56 per cent upside, says Eight Capital

Interested investors can expect a strong Q4 from supply chain software company Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS), according to Christian Sgro of Eight Capital, who delivered an update to clients on Kinaxis on Wednesday.

Ottawa-based Kinaxis provides cloud-based subscription software for supply chain operations, with its RapidResponse platform serving customers in a variety of industries such as technology and electronics, aerospace and defence, life sciences and pharmaceuticals, industrial, automotive, consumer products and retail markets.

Sgro’s updated analysis comes ahead of the company’s fourth quarter and year-end results for the 2021 fiscal year, which is expected on March 1, along with management guidance on 2022 estimates.

“On balance, we think the 2022 guidance has the potential to surprise positively on the top-line (which we think could lead to a positive reaction from the stock) but we remain cautious on profitability – where the company has historically under-promised and over-delivered,” Sgro said.

The Eight Capital revenue projection of $67.1 million for the final quarter are in line with the consensus estimate of $67 million, and would produce a year-over-year increase of 22.1 per cent, as well as four per cent sequential growth. (All figures in US dollars except where noted otherwise.)

Of that revenue, $47.2 million are forecasted to come from its SaaS sector to account for 70.3 per cent of the revenue mix, with professional services accounting for an additional $14.9 million (22.2 per cent) of the revenue equation.

Eight Capital’s adjusted EBITDA projection of $10.3 million and a 15.4 per cent margin is a small step ahead of the consensus estimate of $9.6 million and a 14.3 per cent margin. Though it is down from the 19.2 per cent margin and $12.4 million from the previous quarter, the figures are still ahead of the $6.1 million and 11.1 per cent margin reported in the same quarter of 2020.

In terms of gross margin, the Eight Capital forecast of $44.1 million and a 65.7 per cent margin is largely in line with the $44.3 million and 66.2 per cent margin projected by the consensus, and sequentially in line with the $42.6 million and 66.1 per cent margin from the previous quarter.

Most recently, Kinaxis announced an agreement with Cardinal Health, a multinational distributor of pharmaceuticals, a global manufacturer and distributor of medical and laboratory products, and a provider of performance and data solutions for health care facilities. In the agreement, Kinaxis will increase medical product visibility and delivery through improved supply chain agility for Cardinal Health, primarily through concurrent planning and end-to-end network visibility and transparency.

The agreement will also allow Cardinal Health to account for seasonality and pandemic planning, instantly balance demand and supply while accounting for capacity safeguards and simulate product supply scenarios.

“Concurrent planning is becoming critical for the medical industry. Being able to monitor risks, adapt quickly and react to change in real time means people get their medical needs met, even if there’s disruption. Kinaxis RapidResponse is the world’s first and only concurrent planning platform,” said John Sicard, Kinaxis CEO in the company’s February 9 press release. “We’re excited to collaborate with Cardinal Health to bring this advanced planning to healthcare customers and increase accessibility to the products they need most.”

Sgro projects modest growth for Kinaxis in the next two years, as he forecasts a year-end revenue target of $249.3 million for 2021 for an implied year-over-year increase of 11 per cent. Looking ahead to 2022, Sgro forecasts 28 per cent year-over-year growth, with the target figure landing at $318.2 million.

From a valuation perspective, Sgro forecasts the company’s EV/Revenue multiple to drop from the reported 13.3x in 2020 to 12x in 2021, then to a projected 9.4x in 2022.

Meanwhile, Sgro projects adjusted EBITDA of $38.9 million and a 16 per cent margin in 2021, down from the $53.8 million and 24 per cent margin reported in 2020. Sgro’s 2022 projection returns to levels similar to 2020, with projections of $72 million in adjusted EBITDA and a 23 per cent margin; he also introduces an EV/adjusted EBITDA projection of 41.4x for 2022.

“We believe Kinaxis deserves to trade at a premium to peers given the strong demand backdrop and Kinaxis’ reliable blend of growth plus profitability,” Sgro said. “Risks to our target include delays to sales cycles and intensifying competitive conditions.”

After a very production 2020 where the stock returned 79 per cent, KXS’s 2021 was up and down, finishing down two per cent. Over the past 12 months, Kinaxis has seen its share price drop by 16.1 per cent, with a loss of 16.8 per cent since the start of 2022. With the update, Agostino maintained a “Buy” rating on KXS and target price of $230/share for a projected return at press time of 56 per cent.