December 2, 2020
The Descartes Systems Group Inc.
Well positioned for 2021
Our view: Descartes reported Q3 above expectations, with higher organic growth, revenue and profitability. In light of the widening gap between baseline and actuals, we estimate Descartes’ outlook implies Q4 slightly above consensus. Descartes appears well positioned to benefit from strengthening organic growth in 2021, given the improving global trade and commerce environment. Maintain Outperform, target moves to US$68.00.
Key points:
• Q3 above RBC/consensus expectations. Q3 adj. EBITDA rose 16% Y/Y to $36.4MM, above RBC at $34.3MM and consensus at $34.7MM. The upside reflects higher profitability (41.6% adj. EBITDA margins vs. RBC at 40.1%) and improved organic growth (1% vs. RBC at 0%). Revenue rose 5% Y/Y to $87.5MM, exceeding RBC at $85.4MM and consensus at $86.0MM. GAAP EPS of $0.15 was slightly above RBC/consensus at $0.14.
•Organic growth benefits from global trade and commerce improvement. Descartes’ constant currency organic growth improved to 1%, up from 0% Q2, and above RBC at 0%. The improvement stems from stronger global trade, e-commerce and sustained demand for trade content. While air cargo still remains below previous levels (due to reduced capacity from fewer passenger flights), volumes increased better than management’s expectations, as airlines increased cargo flights. We are slightly increasing our constant organic growth estimates to 1.4% FY21e and 4.4% FY22e from 1.2% and 4.2% previously.
• Q4 outlook appears healthy. Q4 baseline for $83.0MM revenue and $29.5MM adj. EBITDA compares against our expectations for $84.7MM and $28.1MM. The delta between actuals and baseline has widened over the last two quarters. Assuming the delta between actuals and baseline is similar to the last two quarters, baseline implies Q4 actuals at $90.4MM revenue (7% Y/Y) and $38.4MM adj. EBITDA (19% Y/Y), above consensus at $88.9MM and $36.0MM respectively.
• Well positioned for 2021. Despite COVID-19 headwinds to air cargo volumes and organic growth, Descartes has delivered adj. EBITDA growth slightly above its long-term target for 10-15%. Looking forward, Descartes appears well positioned to benefit from a rebound in organic growth in 2021. Additionally, M&A remains an upside catalyst, with many targets available and Descartes having access to capital (e.g. $101MM net cash + $500MM credit facility).
• Maintain Outperform, adjusting target from US$67.00 to US$68.00. Despite the multiple expansion in software stocks, Descartes is only trading at 31x FTM EV/EBITDA, just up from 29x in January, below peers at 45x. Our $68.00 price target reflects our revised financial estimates and is based on 31x CY22e EV/EBITDA (unchanged), justified below supply chain & fleet management peers (45x), given Descartes’ historical discount to peers. Descartes has converted 84% of adj. EBITDA into FCF over the last 5 years.