Eight Capital lowers target on Kinaxis

Following the company’s most recent quarterly results, Eight Capital analyst Christian Sgro has lowered his price target on Kinaxis (Kinaxis Stock Quote, Chart, News, Analysts, Financials TSX:KXS).

On February 28, KXS reported its Q4 and fiscal 2023 results. The company posted Adjusted EBITDA of $19.7-million on revenue of $111.9-million, a topline that was up 14 per cent over the same period a year prior.

“We are steadily marching towards our baseline midterm adjusted EBITDA margin target of 25 per cent. Our 2024 guidance reflects the current ARR growth level, ongoing operating leverage, but also the impacts of being at the low point in our normal cycle for our high-margin subscription term licence revenue and our current transition to public cloud, which involves some duplicative costs. Normalizing for these two items better demonstrates our steady progress,” said CFO Blaine Fitzgerald. “I am particularly pleased to have generated a record $77.1-million in free cash flow in 2023, which is over 70 per cent higher than in any other year. It’s another data point that demonstrates our focus on balancing strong growth and profitability.”

Sgro said this development, for him, was more about the guidance, which he found to be lacking.

“Kinaxis reported 2024 guidance behind consensus (link to our first look here), resetting near-term growth expectations lower,” he wrote. “We believe in Kinaxis’ product market leadership; however, we think a more challenging macro and inertia from large prospective customers have tempered growth this year. A Rule of 40 company on normalized results, we continue to view Kinaxis as a top-tier Canadian holding, albeit facing the pressure of a tighter enterprise spending environment. In the meantime, the company reiterated all margin expansion objectives, driving cash flows higher as software growth reaccelerates.”

In a research update to clients March 1, the analyst maintained his “Buy” rating but lowered his price target on Kinaxis from $230.00 to $190.00.

Sgro thinks KXS will post Adjusted EBITDA of $84.9-million on revenue of $492.1-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $132.2-million on a topline of $589.4-million the following year.

“We are reiterating our BUY rating and decreasing our target price to C$190.00 (from C$230.00) based on 6.5x 2025E EV/revenue (from 9.0x 2024E EV/revenue). We are decreasing our target multiple given our reduced near-term growth estimates; however, we believe this target multiple is well supported by Canadian peers who trade at 6.4x on average,” he added.