Magnet Forensics is heading to $36, says Laurentian

Ahead of third quarter earnings from Magnet Forensics (Magnet Forensics Stock Quote, Charts, News, Analysts, Financials TSX:MAGT), Laurentian Bank Securities analyst Nick Agostino is staying bullish on the stock, maintaining a “Buy” rating and C$36.00 target price in a Monday update to clients.

Waterloo, Ontario-based Magnet is a digital investigation platform used by public and private sector clients to help solve digital crimes such as cybercrime, IP theft and terrorism. The company is set to report its Q3 on November 9 before market open, with Agostino forecasting $24.0 million in sales (representing a year-over-year increase of 35.2 per cent) and $5.4 million in adjusted EBITDA. (All figures in US dollars except where noted otherwise.)

Kadve said the demand for digital forensics remains intact, as shown by the US Federal Budget, which earmarked $10.9 billion for cybersecurity in 2023, up 11 per cent from 2022.

“[P]er StatCan, 18 per cent of Canadian businesses were impacted by cybersecurity incidents in 2021. Despite a reduction in incidents since 2019, the amount companies spent on cybersecurity increased by $2.8 billion over this timeframe,” Agostino wrote.

By business segment, Kadve is expecting $0.3 million from Magnet’s Perpetual License revenues, down 65 per cent from a year earlier and reflecting the company’s ongoing shift to Term License sales; $6.1 million from Term License, up 56 per cent year-over-year and benefitting from increases in new and existing customers and an expanded product suite, Kadve pointed out; $14.9 million in revenue from Software Maintenance and Support, good for a 40 per cent growth rate; and $2.8 million from Professional Services, representing a 16 per cent uptick in support of the company’s new contract wins.

Kadve noted that Magnet’s balance sheet is strong enough to support further M&A from the company.

“Following Q2/22 results, we estimate MAGT currently has a net cash position of $117.5 million (inclusive of lease liabilities), with minimal debt on the Balance Sheet. Alongside its $25 million credit facility, we estimate the company has $142.5 million in dry powder to facilitate opportunistic M&A, for which MAGT noted on its Q2 call that they are involved in a few discussions and are looking for tuck-ins in the range of $5-20 million,” he wrote.

Further out, Kadve is forecasting Magnet to deliver full 2022 revenue and adjusted EBITDA of $95.1 million and $15.9 million, respectively, and 2023 revenue and EBITDA of $123.7 million and $22.4 million, respectively. At press time, his C$36.00 target represented a projected one-year return of 33.1 per cent.