Descartes Systems Group Inc.

Descartes Systems Group (TSX: DSG) provides a software solution that allows users in the shipping industry to communicate with one another. Descartes charges clients to send/receive messages, data, and documents on the GLN (the transactions). 

Key Highlights:

• Recently, the company announced that it has teamed up with UPS under its UPS Digital Access Program (DAP). This would enable small and medium-sized businesses (SMBs) to be able to access discounted UPS rates to reduce domestic and international eCommerce shipping costs.
• Recently, DHL Aviation has decided to use Descartes’ Global Air Messaging Gateway as its preferred platform to standardize electronic messaging with its global customer base. DHL will also deploy Descartes Air Shipment Management, which would be utilized to collect, prepare and submit the required advance electronic information for global air cargo security filings to a growing range of countries worldwide.

Q1FY20 Financial Highlights: For the period ended April 30, 2020 the Company reported improved revenue of USD 83.7 million as compared to USD 78 million in the previous corresponding period (pcp), aided by decent growth in the ‘Service Revenue’ segment and a positive impact from the recent acquisition. Gross margin stood higher at USD 61.8 million, up from USD 58.1 million in pcp, thanks to the higher income. Adjusted EBITDA was reported at USD 33.0 million, reflecting a growth of 15% over Q1FY20. The Company posted a net income of USD 11.0 million as compared to USD 7.3 million in Q1FY20. The increase was driven by higher gross margin, stable operating expenses and a lower other charges and a significant decline in the interest expense.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: 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 sales, increase costs or result in liability claims, and seriously harm the business.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of DSG stood resilient in the recent past and appreciated ~18% and ~43% in the last six months and one year, respectively, amidst volatility in the equity market on account of COVID 19 scenario. Investors should note that the DSG stock is trading above its 200-days simple moving average of CAD 58.52, indicating a bullish trend. DSG has undertaken a restructuring plan to reduce its costs base, which will further strengthen the financial position of the company. The company recently acquired Peoplevox Limited, a UK-based provider of cloud-based eCommerce warehouse management solutions. We believe this acquisition is likely to strengthen the group’s offerings going forward. The stock gained ~27% in the last three months and outperformed the index by ~15%. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a lower single-digit upside potential (in % terms). For the said purpose, we have considered the industry average (Technology). Hence, considering the aforesaid facts, we recommend a 'Hold' rating on the stock at the closing market price of CAD 70.79 as on July 24, 2020.

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

Absolute Software Corp

Absolute Software Corporation (TSX: ABT) is a software & computer services company, which is engaged in the business of developing, supporting and marketing of data risk management and endpoint security solutions to customers from government, education, healthcare and commercial sectors. The solutions offered by the Company are based on SaaS (software as a service) business model.

The Company declared a quarterly dividend of CAD 0.08 per common share, payable on August 31, 2020.

Key updates:

• Anaheim Union High School District, Duarte Unified School District and Pennsylvania Cyber Charter School has successfully implemented the Company’s product for unbreakable visibility and control needed to ensure their distance learning programs are persistent, resilient and intelligent.

Q3FY20 Financial Highlight: ABT announced its quarterly results, wherein the Company reported total revenue of USD 26.1 million, depicting a growth of 5% on y-o-y basis, aided by growth in the commercial recurring revenue. The Company reported Annual Contract Value Base of USD 101.4 million, reflecting an increase of 7% over the prior corresponding year. Enterprise & Government portions of the ACV Base, increased by 13% on y-o-y basis and represented 70% of the ACV Base. The Education segment of the ACV Base declined by 7% on y-o-y basis, representing the rest of ACV Base revenue. Adjusted EBITDA declined to USD 5.5 million (pre-IFRS 16), from USD 5.8 million in the previous corresponding period (pcp). The Company reported cash generation from operating activities at USD 3.3 million, significantly higher from USD 0.9 million in Q3FY19. Net income, during the quarter, stood at USD 2.3 million, as compared to USD 2.5 million in pcp.

Q3FY20 Income Statement highlights (Source: Company Reports)

Risks: Major disruptions to the respective businesses of the Company’s principal customers and/or PC OEM and other partners would have a material impact on the Company’s business, operations, and revenues.

Stock Recommendation: The Stock of ABT soared ~63% and ~93% in the last six months and nine months, respectively, as the group witnessed higher traction across the VPN applications. The Company expects its FY20 revenue to grow at 4% to 7% over FY19 to USD 103 million to USD 106 million, which is impressive. To ensure ample liquidity, the Company has lowered its capital expenditures to between CAD 3.0 million to CAD 4.0 million, augurs well to support the working capital requirements. Furthermore, the Company is expecting its improved Adjusted EBITDA margin for FY20 through operational efficiency, which is encouraging. We believe, the Company’s has a niche product-line and indulges in offering virtual private network (VPN) applications, ensuring uninterrupted remote access to corporate and school networks, business and education applications as well as data for remote workers. Considering the current environment created by COVID-19 pandemic, we expect higher demand for the group’s offerings as it enables the people to operate remotely, which is a key positive for the business. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 14.85 on July 24, 2020.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.