Kinaxis could soon be acquired, National Bank says

Is the recent drama at Kinaxis (Kinaxis Stock Quote, Chart, News, Analysts, Financials TSX:KXS) simply Sound and Fury, signifying nothing?

No, says National Bank Financial analyst Richard Tse, who says the shakeup could lead to the sale of the company.

On September 9, KXS announced it had received a letter from investor Daventry Group calling for the sale of the company.

“Daventry Group, LP (“Daventry” or “we”) has been a significant, long-term shareholder of Kinaxis Inc. (the “Company”) since March of 2021, and we appreciate the constructive relationship we have had with management throughout this time. However, given the recent unexpected announcement of the departures of the Company’s long-time CEO John Sicard and new Chief Sales Officer Claire Rychlewski, we are now publicly calling on the Board to immediately formalize a process to explore a sale of the Company,” the letter read. “We believe Kinaxis is a highly strategic asset that is nonetheless dramatically undervalued at its current share price, where it trades at less than half the multiples of both its public and private company peers. We believe this gulf in performance is due entirely to Kinaxis’s poor execution in recent years, which we believe has been self-inflicted under the supervision of the current Board. Now, after years of underperformance, the Board – led by Chairman Bob Courteau, who has sat on the Board since 2016 – is asking shareholders to trust it to hire a new CEO and undertake a risky and uncertain operating plan that our experience suggests will take years to implement. Going down this path would be a tremendous mistake and a missed opportunity for Kinaxis to monetize its strong competitive positioning today.”

Tse weighed in on the matter.

“Having read through the entire Daventry Group notice and accompanying letter – we’d broadly agree with their view that the shares are undervalued and some of their reasons (particularly their take on the Company’s leading platform – which line up with our own long-standing view) should (have been) be monetized at a higher rate,” he wrote. “With respect to Daventry’s take on KXS’ relative valuation to precedent transactions, the Board letter implies a potential +2x lift in valuation if one were to ascribe those comparable precedent valuations to Kinaxis today. We don’t think that’s unreasonable given Kinaxis’ product leadership; but would note, some of those transactions occurred during a period of heightened valuations. That said, our view is that the strategic and financial value from this asset would be notably higher than the current stock price under an acquisition scenario. Our take on precedent transactions has the average valuation just under 10x EV/S, KXS current valuation is about 5x EV/S on 2025 estimates.”

In a research update to clients September 9, Tse maintained his “Outperform” rating and price target of $225 on KXS, implying a return of 49.6% at the time of publication.

Tse thinks KXS will post Adjusted EBITDA of $98.0-million on revenue of $490.6-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $133.1-million on revenue of $578.9-million in fiscal 2025.

“Bottom line, we’ve often called this name out as one of our likely coverage targets for an acquirer and Daventry’s notice lines up with that thinking,” the analyst concluded. “As for Kinaxis, the Company responded with a press release this afternoon acknowledging the letter and our discussion with them just after that release had the Company saying it would not provide any commentary beyond that. In our view, we think the current events underscore an undervalued asset while at a minimum heightening the level of scrutiny which should be positive in supporting execution.”