From Bell analyst…
US acquisition hits the sweet spot
We view CAT’s acquisition of XOS, a leader in video analytical software, as both transformative and strategic that will
1) enhance its service offering to existing clients
2) increase its penetration into the key US elite sports market and
3) accelerate the company into positive EBITDA and free cash flow in FY17.
The $80m price tag for XOS represents an FY16 EBITDA multiple of 10x which we believe is reasonable given its high percentage of recurring revenue and highly complementary attributes.
Postacquisition, CAT will have a highly differentiated product offering, a stronger customer base generating over $50m in revenue with ~76% recurring and ~77% from North America.
Large revenue and earnings upgrades Incorporating the acquisitions and capital raising into our forecasts has resulted in large increases in revenue and EBITDA in FY17, FY18 and beyond.
For example, we have upgraded FY18 EPS by ~50%. The major assumptions underlying our forecasts are XOS revenue growth of ~6% with flat margins and 3,000 additional units sold by FY18 due to the accelerated unit growth that we expect XOS to deliver. We are conscious of the additional benefits XOS is likely to deliver above the initial cross sell opportunity however we see this as upside to our current forecasts.
We continue to value CAT using a DCF with a 12% WACC and terminal growth rate of 5%. We have also removed our Speculative risk rating given the company’s proforma FY16 result is EBITDA positive and we are forecasting the company to remain EBITDA and Free Cash Flow positive in FY17 and beyond. Our Price Target has increased by 18% to $3.85 which is equivalent to ~$112m in value creation compared with our previous Price Target. We believe this is fair given the additional units we expect to be sold to XOS’s clients and the longterm synergies through product innovation.
We remain positive on CAT’s future growth outlook however retain our HOLD rating on valuation grounds.
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