Unique Product Offerings leading to surge in demand: Descartes Systems Group Inc. (TSX: DSG) provides on-demand, software-as-a-service solution to the logistic companies. The group’s offerings help its clients in improving the productivity, performance and security of their businesses.

Investors should note that the company is observing an unprecedented growth in its products and services due to the COVID 19 pandemic. DSC provides an array of logistics services to several logistics players which helps them to track ‘essential commodities’ on a real-time basis. The Company’s business model is resilient, and the stock is currently trading above its 200-day simple moving average (SMA) of CAD 53.05.

FY20 Financial Highlights: For the period ended January 31, 2020, DSG reported a stellar financial number wherein, the Company posted a 18% y-o-y jump in revenues at US$ 325.8 million. The growth was driven by strong momentum in the services revenue segment, aided by growth from new and existing customers in both transactional and subscription products. Income from operations stood higher at US$ 52.3 million, higher from US$ 41.4 million in FY19, thanks to the higher revenue, which was partially offset increased operating expense and higher amortization costs. Net income stood higher at US$ 37 million, as compared to US$ 31.3 million. The Company exited the period with US$44.4 million of cash.

Valuation Methodology (Illustrative): Price/Cash Flow Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock had generated a return of ~14% in the last nine months and currently trading at CAD 55.8 with a market capitalization of CAD 4.68 billion as on 28 April 2020 market close. The company is observing a surge in demand for its offerings from various logistics players across the globe, as it helps the clients to meet their dynamic delivery requirements. The Group recently added two elite clientele who are using specialized services Ecommerce Warehouse Management (WMS) and Transportation management system (TMS) (both are group’s product) to scale-up the existing services in an efficient manner. The Company has a strong presence across Canada, US, EMEA, APAC and South America and the Company’s top line is well supported by the high recurring-revenues, ensuring uninterrupted cash flows. We have valued the stock using Price/ Cash Flow based relative valuation and consider Synchronoss Technologies Inc (NYSE: SNCR), Kinaxis Inc (TSX: KXS) etc as peer group and arrived at a target price which implies a potential upside in low double-digit (percentage terms). Hence, we recommend a ‘Buy’ on DSG stock at the closing price of CAD 55.58 on April 28, 2020.

DSG One-Year Daily Price Chart (Source: Thomson Reuters)

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