Descartes Systems Group Inc T.DSG

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These are US targets and their upside scenario target is also raised to US$80.00. GLTA

September 3, 2020

The Descartes Systems Group Inc.

Q2 Preview: Potential upside to conservative outlook

Our view: We believe that Descartes is likely to report Q2 above consensus expectations given that the global trade environment has strengthened since the company provided its outlook. Similarly, the company’s Q3 outlook may also exceed consensus expectations. While several trends are mixed, Descartes is well diversified and seems likely to benefit from stronger demand for e-commerce and trade content. We maintain our Outperform rating and raise our price target to $67.00 from $57.00.

Key points:

• Expect Q2 above conservative outlook. Descartes will report Q2/FY21 results (Jul-qtr) on September 9. We forecast Q2 revenue to increase 4% Y/Y to $83.8MM, above consensus of $81.5MM. Similarly, our outlook calls for adj. EBITDA to rise 10% Y/Y to $33.2MM, ahead of consensus of $32.5MM. For GAAP EPS, our estimate for $0.14 is above consensus of $0.12. Our estimates imply Q2 revenue at 108.8% of baseline, above Descartes’ 4-quarter average of 105.3%. The larger delta reflects the improved global trade environment compared to baseline (based on April volumes).

• Organic growth likely to trough Q2. Our model calls for constant currency organic growth to decelerate to 1% Q2, down from 3% Q1. COVID-related disruptions to global trade are likely to weigh on Descartes’ transactional and non-recurring revenue. Stronger demand for some of Descartes’ services like trade content could offset contraction in transaction volumes and customer churn. We expect organic growth to improve to 3% Q3 and 5% Q4.

• Anticipate Q3 baseline to suggest Q3 actuals above consensus. In light of the improvement in the global trade environment since Descartes last reported and expected contribution from the $12MM Kontainers acquisition (est. $0.75MM revenue, $0.25MM adj. EBITDA contribution Q3), we believe Q3 baseline may suggest actuals above consensus. Q3 baseline above $82MM revenue and $27MM adj. EBITDA would point to Q3 actuals above consensus ($85MM revenue, $34MM adj. EBITDA) given the historical average delta between actuals and baseline.

• Key global trade metrics show a recovery through the summer. ATA’s Truck Tonnage Index averaged 110.4 in May–July, up 3% from April. Air cargo tonne kilometers (CTKs) averaged -17% Y/Y in May–July, up from -26% in April. Seasonally adjusted U.S. store-based retail sales averaged -4% Y/Y and non-store retail (i.e., e-commerce) sales rose 26% Y/Y for May–July, compared to -26% and 23%, respectively, in April.

• Maintaining Outperform rating, raising price target to $67.00 from $57.00. We roll forward the basis of our target valuation multiple from CY21e to CY22e. Our new $67.00 price target is based on 31x CY22e EV/ EBITDA (previously 30x CY21e EV/EBITDA), below supply chain & fleet management peers (43x) given Descartes’ historical discount to peers. Descartes has converted 84% of adj. EBITDA into FCF over the last five years.