Descartes Systems Group Inc.

Descartes Systems Group Inc. (TSX: DSG), is a technology company focused on logistics and supply chain management business processes. Its solutions are cloud-based and are focused on the productivity, performance, and security of logistics-intensive businesses. 

Key highlights 

• New Client Win: Recently, the company announced that Berlin-based KoRo Handels GmbH company is using its eCommerce Warehouse Management Solution (WMS) to scale fulfilment operations and improve customer satisfaction. This rapid-to-deploy automation enables small-to-medium-sized retailers to scale to support growing eCommerce demand. 

• Zero debt in the books: There is no debt in the books of the company, this shows how sound the company is on financial ground. 

• Restructuring Plan:Due to economic uncertainty, the company undertook a restructuring plan to reduce its cost to strengthen the financial position. Under this, they are reducing their workforce by approximately 5% and closed many office facilities where work from home became a viable option. This restructuring process costs USD 2 million and is expected to complete during the fourth quarter of fiscal 2021. The company expects annualized cost savings of approximately USD 6 million to USD7 million from this.

• Healthy cash position: As on October 31, 2020, the company had USD 114.4 million in Cash, increased by USD 70 million as against USD 44.4 million on January 31, 2020, supported by the Cash provided by operating activities of USD 33.1 million, up 20% from USD 27.5 million in Q3 2020.

• Event Update: The company will be reporting its fiscal 2021 fourth-quarter and year-end financial results after market close on Wednesday, March 3, 2021.

Financial overview of Q3 2021 (In millions of USD, other than per share amounts)

Source: Company

• In Q3 2021, the company posted total revenues of USD 87.5 million, increased by 5.4%, as against USD 83.0 million, in the previous corresponding period. The increase was primarily due to acquisitions made by the company, which contributed an incremental revenue of USD 2.2 million, along with growth in transaction and subscription revenues from new and existing customers.
• Income from operations in the reported quarter stood at USD 18.8 million as against USD 13.7 million in Q3 2020, primarily due to high revenues and low cost of revenues.
• The company posted net income of USD 13.3 million, increased by 37% in Q3 2021, against USD 9.7 million in the previous corresponding period. 

Risk associated in investment

The company is exposed to various risks such as system or network failures, information security breaches or other cybersecurity threats in connection with the services and products. 

Valuation Methodology (Illustrative): EV to EBITDA 

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company is under restructuring process and is expected to complete in the next six months, from which they expect an annualized cost savings of approximately USD 6 million to USD 7 million. In the future, this would enhance their profitability. The company is debt-free, which means there is no pressure of any interest cost. The company's recent acquisitions have also started paying off in terms of revenues and going forward; it would improve the group's financial position. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 74.05 on February 23, 2021. We have considered Kinaxis Inc, Enghouse Systems Ltd, Tecsys Inc etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

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