Mission Produce Inc T.AVO

Scotiabank: Sector Outperform rating and $22 target for AVO

[shakerman640]

According to Scotiabank:

https://is.gd/mtjSqP

Avigilon Corporation

Rating: Sector Outperform

Target 1-Yr: C$22.00

ROR 1-Yr: 77.8%

Key Risks to Target: Revenue growth may slow

Schmode Resigns

Event

- Avigilon announced that COO Bryan Schmode has resigned.

Implications

- Shares are undervalued. AVO shares fell by 11.6% following the news and are now trading at only 12x 2016E P/E. In our view, for a company that is expected to grow revenue by 29% and EPS by 67% next year, the shares are undervalued at these levels. This is also at a discount to peers at 19x (Exhibit 1).

- Market is overreacting. Our sensitivity analysis (Exhibit 2) shows that even if Avigilon's growth were to slow to the market growth rate of 10% in 2016, the shares would still be trading at a discount to peers (16x vs. 19x). AVO has not had a growth rate this low since its IPO; the lowest YOY growth rate in a quarter was 35.3%. To put this another way, at current levels we believe the market is assuming that AVO will grow only ~15% next year (half of our 2016 estimate) at a 15% EBITDA margin (the same as this year's investment-heavy estimate). We argue that if growth were to fall precipitously, costs could be cut to maintain margins.

- Avigilon is still a prime takeout candidate, especially as the share price drops. Using the multiples that Canon paid for Axis, we believe Avigilon could be taken out for $23-$30 per share. Leading Chinese security camera leaders are logical acquirers, in our view, given their hardware leadership, but software weakness.

Recommendation

- Maintain SO. There are no changes to our rating or estimates.