Kinaxis has a 54 per cent upside, says Eight Capital

Christian Sgro of Eight Capital remains confident in Kinaxis (Kinaxis Stock Quote, Charts, News, Analysts, Financials TSX:KXS), maintaining a “Buy” rating and target price of C$230/share for a projected return of 54 per cent in an update to clients on Wednesday.

Ottawa-based Kinaxis provides cloud-based subscription software for supply chain operations in Canada, the United States, Europe and Asia. Through its RapidResponse platform, Kinaxis serves clients in technology and electronics, aerospace and defence, life sciences and pharmaceuticals, industrial, automotive, consumer products and retail markets.

Sgro’s updated analysis comes after the company released its fourth quarter financial results which Sgro noted to be strong, along with 2021 year-end figures.

“Management is typically enthusiastic however this time with more data points than usual, all underscoring pipeline strength and breadth and a focus on maintaining market leadership,” Sgro said. “We think the macro backdrop remains as strong as ever and would expect 2022 results to ultimately narrow in on the high end of the guidance ranges.”

Kinaxis’s financial quarter was headlined by $68.5 million in revenue, marking a 25 per cent year-over-year increase. The company’s SaaS sector produced $46.9 million in revenue to account for 68.4 per cent the company’s revenue mix, with professional services coming in at $17 million for 24.9 per cent of the revenue mix. (All figures are in US dollars except where noted otherwise.)

The company also reported adjusted EBITDA of $11.3 million and a 16 per cent margin in the quarter, up from the $6.1 million and 11 per cent margin reported in the same quarter of 2020.

“New customer wins for the year were more than twice that of 2020 and, combined with subscription expansion within our customer base, drove strength in both our annual recurring revenue2 and year-end backlog. As a result, we remain confident in our visibility into rapidly accelerating SaaS revenue growth,” said John Sicard, President and CEO of Kinaxis in the company’s March 1 press release. “As we exit pandemic protocols, we continue to see supply chains at the forefront of boardroom conversations and the news. The need for supply chain resilience has never been more apparent and demands transformation towards true end-to-end concurrent planning – our unique differentiator. Kinaxis has never been more relevant nor better positioned to serve the needs of our markets.”

Over the conference call, company management noted it had guaranteed extensions to some of its fourth quarter contracts, with Sgro believing those contracts will help the company’s ARR trend above the 20 per cent threshold to drive 23 to 25 per cent growth long-term SaaS growth.

According to Sgro, Kinaxis is in the process of building its professional services capacity aggressively to meet demand, while also offloading 70 per cent of work to its partner channel. In addition, Kinaxis management believes the company can produce adjusted EBITDA margins between 30 and 35 per cent in the long term with more of a focus on profitability.

After Kinaxis finished 2021 with $250.7 million in revenue, Sgro has raised his target for 2022 from $318.2 million to $343.3 million to forecast a 37 per cent year-over-year increase. Looking ahead to 2023, Sgro forecasts revenue of $388.6 million to imply a year-over-year increase of 13 per cent.

From a valuation perspective, Sgro forecasts the company’s EV/Revenue multiple to drop from the reported 12.2x in 2021 to a projected 8.9x in 2022, then to a projected 7.8x in 2023.

Meanwhile, Kinaxis finished its 2021 fiscal year with adjusted EBITDA of $39.9 million for a 16 per cent margin, down from the $53.8 million and 24 per cent margin reported in 2020. Looking ahead to 2022, Sgro has lowered his projection to $61.6 million for an 18 per cent margin (previously $72 million in adjusted EBITDA and a 23 per cent margin), while his 2023 projection is set at $65.7 million for a 17 per cent margin.

In terms of valuation, Sgro’s EV/adjusted EBITDA multiple is set at 49.5x for 2022, followed by a slight dip to 46.4x in 2023.

Sgro’s estimates also have Kinaxis trading at 7.8x 2023E EV/revenue compared to Canadian and US software peers at 7.2x and 10.8x, respectively.

“Given our confidence in the model and outlook, we believe Kinaxis deserves to trade at a premium to peers and that strong fundamental performance will continue and will be met with valuation upside through the year,” Sgro said.

Kinaxis has seen its stock price drop by 9.2 per cent over the last 12 months, with a loss of 13.2 per cent since the start of 2022. After dropping to a 52-week low of $133.01/share on June 7, Kinaxis climbed to a 52-week high of $229.10/share on November 19, though it has dropped off since then.