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 

• Restructuring Plan:Due to economic uncertainty caused by COVID-19, the company undertook a restructuring plan to reduce the cost to strengthen the financial position. Under this, the company is reducing its 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 fulfil in the next six months. The company expects annualized cost savings of approximately USD 6 million to USD 7 million from this.  

• Cash Position: As on July 31, 2020, the company had USD 81.9 million in cash. Cash increased USD 25.9 million in Q2FY21 and increased USD 37.5 million in 1HFY21. 

• Zero debt in the books: There is no debt in the books of the company, which reduce the balance sheet risk.

• Acquisitions: The company made few acquisitions this year. On February 21, 2020, they acquired Peoplevox Limited, a UK based service provider of cloud-based e-commerce warehouse management solutions at the price of USD 24.1 million. On June 10, 2020, they acquired Cracking Logistics Limited again a UK-based provider of client-facing digital freight execution platforms at the cost of USD 5.4 million. 

Financial overview of 2Q 2021 (US dollar Million)

Source: Company

• The company posted the revenues of USD 84.0 million, up 4% from USD 80.5 million on Y-o-Y basis. Revenues from the services segment were USD 75.3 million (90% of total revenues), up 5% from USD 71.4 million recorded in Q2FY20.
• In 2Q FY21 Cash provided by operating activities was USD 34.1 million, up 27% from USD 26.9 million in Q2FY20 and up 24% from USD 27.5 million in Q1FY21.

• In 2Q FY21 Income from operations were USD 15.0 million, up 15% from USD 13.1 million in Q2FY20 and down from USD 15.7 million in Q1FY21.

• Net income in 2Q FY21 was USD 10.5 million, up 22% from USD 8.6 million in Q2FY20 and down from USD 11.0 million in Q1FY21.

• Reported earnings per share on a diluted basis in 2Q FY21 was USD 0.12, up 20% from USD 0.10 in Q2FY20 and down from USD 0.13 in Q1FY21.

Risk associated with investment

The company is exposed to various risks such as system or network failures, information security breaches or other cyber security threats in connection with the services and products. These risks could reduce the revenues and increase costs or result in liability claims can seriously harm the business.

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 are expecting an annualized cost savings of approximately USD 6 million to USD 7 million. The company is debt-free, which reduces the balance sheet risk. The recent acquisitions made by the company have also started paying off in term of revenues, and going forward, they will enhance the financial position of the group. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 70.37 on 29 October 2020.

We have considered Manhattan Associates Inc, Enghouse Systems Ltd, Tecsys Inc etc. as the peer group for the comparison.

DSG daily technical chart. Source: Refinitiv (Thomson Reuters)

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