Doug Colbeth, CEO of Kinaxis, says that any takeover valuation would have to reflect the company’s aggressive growth plans.Dave Chan/The Globe and Mail
Investors who took a chance on a Kinaxis Inc., a cloud-based software company with a "secret sauce" for supply chain operations, have been richly rewarded since it went public a year ago, and many analysts believe the run isn't over yet.
The Ottawa-based company's stock is up a stunning 140 per cent since it was listed on the Toronto Stock Exchange in June, 2014. That's compared with about a 25-per-cent increase in the iShares North American Tech-Software exchange-traded fund over the same period. The S&P/TSX composite index, meanwhile, has been flat.
The software firm, founded in 1984, has clawed its way to success with a product called RapidResponse, which helps companies make real-time production decisions to fill orders and manage inventory.
"Their secret sauce is a unique patented algorithm which sets them apart in the marketplace," said Laurentian Bank Securities analyst Nick Agostino.
Analysts are impressed by the company's ability to rack up recurring revenues and land big-name customers such as Ford Motor Co., Lockheed Martin Corp. and Qualcomm Inc. Many expect the company to increase both revenue and earnings by at least 20 per cent annually in the years to come. These factors combined also make it a likely takeover target at some point, which is adding a bit of a premium to the stock price.
"Investors haven't missed the growth," said Mr. Agostino, who has a "buy" rating on the stock with a $31.50 target. "I do believe an investor that gets in now, at the very least, has comfort that the [takeover] scenario is out there."
BMO Nesbitt Burns analyst Thanos Moschopoulos said the company is also riding the technology wave in today's market, but benefiting mostly from its own strong sales growth.
The company's subscription revenue, which accounts for more than three-quarters of sales, grew 28 per cent last year and 36 per cent in the first quarter compared with the same year-earlier periods. Kinaxis is forecasting that 2015 subscription revenue will increase by 26 to 28 per cent.
"That multiple expansion really reflects the fact that they've been executing well. As a result of that there's been growing investor interest in the stock," said Mr. Moschopoulos, who has an "outperform" (similar to "buy") rating and $32 target on the stock.
There are risks, including competition in the rapidly changing technology space, as well as the ability of Kinaxis to maintain its growth level and meet high expectations from analysts and investors.
Among eight analysts that cover Kinaxis, seven have a "buy" or equivalent rating, while one says "hold." The stock – which went public at $13 on June 10 last year – hit a high of $32.18 on May 27 and is currently trading at about $30. Analyst targets over the next year range from $30 to $40.
National Bank Financial analyst Kris Thompson recently downgrade the stock to "sector perform" from "outperform," saying Kinaxis "seems fairly valued," but also increased his target to $30 from $25.
"Our view is that Kinaxis is an acquisition target … offering upside beyond our target price," said Mr. Thompson, citing software giant SAP as a potential buyer.
CIBC World Markets analyst Todd Coupland initiated coverage of Kinaxis recently with a $40 target, citing a "reliable growth rate" as well as "takeout possibilities," with a number of potential buyers.
"Our view is Kinaxis is confident in its strategy and does not want to be taken over at this point," Mr. Coupland said in a note. "If it continues on as we have forecast, it will have a long runway to create additional value as a stand-alone company."
Kinaxis chief executive officer Douglas Colbeth said that any takeover valuation would have to reflect the company's aggressive growth plans, which are to expand annual revenue from about $100-million today to $1-billion, during an unspecified time period.
"When we are approached, our view is: We believe that we should get a value that assumes we're going to continue to run the business the way we are running it now," Mr. Colbeth said. "That assumes we keep performing for two to three years the way we're performing now."
Traditionally, he said buyers give potential takeover companies credit for another year of good performance.
"We're so confident that we want more credit than that," Mr. Colbeth said.
The company is considering a future listing on the Nasdaq Stock Market, and has no plans in the short term to pay a dividend, Mr. Colbeth said.
Instead, he said Kinaxis expects to use its growing cash pile to expand the business, potentially through its own acquisitions.