EXFO Inc.

EXFO Inc. (TSX: EXF) provides technology solutions for wireless and wireline network operators across the telecom industry. The company serves the communications service providers (CSPs) and data center, cloud and webscale operators with a field test, service assurance and analytics solutions, maintenance, and management of mobile networks.

Key Updates:

• Better margin than the Industry: The group came up with impressive operational performance during Q1FY20 and reported gross margin and EBITDA margin of 54.2% and 19.7%, respectively, as compared to the industry median of 53% and 16.4%, respectively. Pretax margin also stood above the industry median at 8%, as compared to 6.9%.
• Improved offerings to drive better customer-satisfaction: The group is focusing on offering better service to its clients and hence, during Q1FY21, EXF acquired InOpticals, which offer ultra-high-speed test instruments for laboratory and manufacturing markets. The above acquisition would enhance the company’s R&D segment, which would further lead to improved business prospects through better client servicing. Moreover, the Launched FIP-500 Fiber Inspection Scope, which is expected to improve multi-fiber connector testing within the data centers and telecom networks, and hence, augurs well for better service to the end-users.

Q1FY21 Financial Highlights:

• EXF announced its quarterly results, wherein the group posted sales of USD 71.512 million, as compared to USD 73.551 million in the previous corresponding period (pcp). The decline was primarily due to a lower test and measurement income (USD 50.473 million versus USD 55.947 million in pcp), while partially supported by a higher service assurance, systems and service income (USD 21.046 million versus USD 17.749 million in pcp).
• The group reported lower input costs during the quarter, which has resulted in increasing in earnings before income taxes of USD 5.735 million, compared to USD 2.606 million in the previous corresponding period (pcp). Cost of sales and Selling and administrative expense stood at USD 29.869 million and USD 21.606 million, respectively as compared to USD 30.241 million and USD 24.504 million, respectively in pcp. Meanwhile, a higher Amortization of intangible assets costs amounting USD 2.549 million, as compared to USD 1.632 million in Q1FY20 remained as a drag.
• The corporation reported net earnings of USD 3.554 million, improved significantly from a loss of USD 0.063 million in pcp.
• EXF posted a cash balance of USD 15.392 million, while total assets were recorded at USD 291.758 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Reduction in the order book might pose a challenge for the company, which might impact the company’s overall income.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

In Q1FY21, the group reported a higher adjusted EBITDA USD 9.9 million, representing 13.9% of sales, as compared to USD 7.5 million, reflecting 10.3% of sales in Q1FY20, which is a key positive. With the deployment of 5G and cloud services, we expect increasing demand for hardware and software solutions from the service providers in the coming days. We have valued the stock using P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Anritsu Corp, Viavi Solutions Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.58 on January 21, 2021.

EXF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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