Hello everyone,
I am a junior at a Canadian university who worked on an initiating coverage report for my finance club. I understand that most people would probably not go through a 10+ page report just to give out advice but I was hoping to get some feedback on things like thesis points, valuation, etc (basically just first page stuff).
To be honest, my initial intention was to use this report as something to talk about while networking with Equity Research Analysts/associates but I was thinking of getting some feedback from other people before actually bringing this up during my conversations with them.
I would appreciate any feedback on ways to improve this.
| Attachment | Size |
|---|---|
| dsgx_-_report_-_wso.pdf 1.29 MB | 1.29 MB |
Hi there,
Not my sector (biotech/spec pharma) but I'll take a quick stab after glossing through it quickly. If you find my comments helpful I'd be happy to go through it in a bit more detail when I get some more time and depending on your timeline. To be fair most of my time was spent on the front page and if you're networking with most people that'll probably be where they spend most of their time as well, so I focused on that.
Nits first:
1) Put net cash somewhere in the financials quick glance box on the front page. If you need to save space, drop USD currency and put it in the parentheses (US$M) or (USD$M);
2) Your EV is wrong on first page. Looks like you forgot to subtract out cash to get from market cap to EV. Double check to make sure it's not affecting your charts and/or thesis and scrub text in body to make sure its consistent after changing;
3) If you know how to calculate it, use adjusted EPS rather than unadjusted. It's usually more relevant and will paint a more consistent picture with your thesis;
4) A lot of reports like to list bearish items/risks on the front page which makes for (in my opinion) a more comprehensive and ultimately more convincing argument and can get help address investor questions or hesitations (or at least identify you've put some thought into it, especially if there is a big one that needs addressing). You have a lot of white space remaining on the front page still (can decrease space between paragraphs) and if necessary drop valuation to the next page.
Substance:
1) I'm not sure what's true for comps in this sector, but just given the market cap I wouldn't describe their balance sheet as "strong". In fact I'd say it's a weakness right now as I don't know a whole lot you can buy with $38mm that would move their needle especially when taking into consideration whatever they need in working capital. You do mention that they recently filed a mixed shelf prospectus which is good (also put the specific date when they disclosed rather than "recently", helps to figure out how much market has priced in the potential impact of that), but they seem relatively low on near-term liquidity for M&A opportunities without having to dilute investors. I would describe them as being a bit weak on cash but having some optionality given their unused revolver and shelf (plus I'm going to guess management may direct future net income to boost cash; confirming that from a company transcript or presentation would be convincing as well).
2) This is an important concept to get across I think, and is often lost on even professional equity research reports that I read sometimes. A high multiple doesn't necessarily mean a company is a good investment--it just means people are willing to pay a lot of money for it. In fact, it can mean it's overpriced if FUTURE performance is not in line with market expectations (see Valeant and/or Enron for examples). Based on your thesis, the important theme to get across is that DESPITE its high price it's a good investment because you expect future earnings to (continue to) outpace market expectations. Based on the current valuation consensus, the market is already generally bullish on the company compared to comps.
Hope that helps.
Thanks for the insight. Really appreciate the feedback.
I made the adjustments for EV and Net Cash on the first page. Still working on calculating Adjusted EPS; shouldn't be a problem. I did think of adding risks on the first page but never followed through with that; guess I am going to have to do it now. For your feedback on substance, the reason I highlighted $38m was because I wanted to explain that the firm had this much left AFTER it paid for acquisitions worth ~$70m which goes to show that their internal cash generation affords them the option to go forward with acquisitions without external financing. I need to improve my writing to get this point across. The second point is something I have to change.
Thank you for the help!
Hi - I'm not that familiar with the sector but I can give some feedback. If I was reviewing this, here are things that I would have noted / wanted to confirm with the analyst:
Your Buy rating and target price is on a '6-12 month horizon' yet your conclusion states that the company is 'ideal for investors with a long-term investing horizon'?
Front page valuation paragraph - I don't care what the current multiples are, you already have that on the right-hand side of the cover page. Give me a thumbnail version of how you derived your target price and what you think the market isn't pricing in.
Cite for 'market worth $4 trillion?
I'd also want a breakdown by region. This is a global company, with major global clients, yet I see absolutely nothing on the company's global operations, including a regional sales/profit breakdown. That seems a pretty bad thing to leave out if 40%+ of recurring revenues are generated outside the US, either due to client operations or overseas acquisitions. What are the major currency exposures? Does the company hedge?
At one point you mention that removing the impact of currency movement would have boostd revenue growth by 'approximately 1%' - that seems like an extraordinarily small impact for a company generating 40% of recurring revenue (which you say is 97% of total revenue) overseas.
Numerous typos etc. Minor? Yes. Distracting? Yes.
The company description on page two is too long, and it reads too much like something put out by the issuer's marketing department ('our aim is to unite the global community~~~' etc...bleh. The Company description on the cover page is more like it - basically a one sentence summary of the industry and the company's core businesses, and add a snapshot of sales and profit by business segment and/or region (pie charts are handy).
Middle of page 3, -As can be observed by the exhibit below-. Do you mean 'exhibit above'? Always better to number your figures so you don't need to worry about where the chart is in relation to where you're writing about it ('see Figure 5'). And the chart should clarify that %change is QoQ. The index is unclear for both charts as well - you need to include a '100 = (as of when) above the left axis.
You further note that the index 'displayed volatility' in 2015 and 2016 with 'no clear seasonal trends', but then claim that the Q416 reading is 'representative of strength' and claim 'potential positive momentum'. Even with the further explanation of the Cass Freight Index, I don't really find the argument that convincing.
WTO exports chart - is data only available to 2015? Talking about 2015 is irrelevant unless you're giving background info for the outlook going forward. In fact, some of the reasons given for the slowdown in 2015 seem equally applicable now. The 2% growth forecast for the WTO indicator - is that YoY? Without information on what Q1 2016 was like, it's hard to be convinced that it is a sign of a 'positive growth market'.
Page 6 discussing the various 'markets' served isn't that useful unless you provide some context on how each market or business fits in the company's earnings structure.
Far more useful is to focus on the key reporting segments, really go into detail: Clients want to know what the core drivers are, they want to know what the margins are and what your assumptions are going forward for each major business. Without this level of detail, page 6 is, unfortunately, a waste of space.
Financial Overview: The company wants to 'further increase' the proportion of recurring revenue which is already 97%? Not saying that's wrong; but as someone that's definitely not an expert in the sector that seemed unusually high.
Adjusted margins a promising 34%:- what are EBITDA margins at other firms?
Bottom of page 7 - 'I forecast a 12% CAGR', but the chart below that says 15%. Also, the sources for the two charts on the page say 'Company data' but I'm assuming the estimates are from the analyst?
Comps table: Some clients like having tickers, most recent share price and market cap.
You note that valuations look demanding, yet you think the premium is justified because of the 'future growth outlook' and future acquisitions?
Remember - your job is to a) be right when b) everyone else is wrong. So it's not enough that you make your case - you have to explain why everyone else (the market) is wrong: you have to be a lot more convincing - what exactly is the market overlooking? What isn't priced in? The global trends you said were so favorable for Descartes should be favorable for the company's competitors as well - is there some reason that Descartes is better positioned to benefit from the favorable trends compared to its competitors?
I obviously haven't done the grunt work you've done, but my instinctive reaction on reading this was that future growth was already priced in, this feels more like a Hold to me, not a Buy. As a 'prospective client' I wasn't convinced of your Buy story
Sorry if that was a bit too nit-picky and/or rambly. And I understand this wasn't written for 'public consumption', so to speak. But hope this helps.
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