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Author Topic: Top Pick Rating By "Canaccord"
dewayne18
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May 16, 2008



PEER 1 Network (TSX-V:PIX)



Recommendation: BUY



Current: $1.48

Target: $2.25



Technology – Communications and Content – Telecommunications



Q3/08 RESULTS: PURE GROWTH



We maintain our BUY, top pick rating and C$2.25 target price

for PIX-V shares



We believe the PEER 1 Network’s 5.6x EV/EBITDA multiple of our

F2009E EBITDA of $33.1 million (year ending June) is poised to expand

and bridge the gap with its comparable companies, which trade at 10.2x

EV/EBITDA, as these Q3/08 results reinforce our confidence in our 18%

EBITDA growth expectations for 2008, due to the company’s consistent

20%+ revenue growth and Q3/08’s 560 bps Y/Y EBITDA margin

expansion. PEER 1 reported better than expected Q3/08A revenues of

$22.8 million, up 21.0% Y/Y and Q3/08A EBITDA of $7.4 million, up

45.9% Y/Y.



Because of the Q3/08 results, we are increasing our 2008E EBITDA to

$28.0 million from $27.1 million, but maintaining our 2008E revenues

steady at $90.3 million. We also believe there could be upside to our

2009 estimates as a result of these Q3/08 results, since our F2009E

EBITDA margin estimate stands at only 31.5%, well below the 32.6%

reported during Q3/08.



We also expect PIX shares to graduate to the TSX from TSX-V since the

regulator required three years of full financial results before the

company could move from the Venture Exchange to the TSX. With those

historical results in hand, the company is now poised to move within the

next few weeks.



Valuation


At C$1.48, the PIX shares currently trade at 5.6x our F2009E EBITDA of

$33.1 million, a 34% discount to our C$2.25 12-month target, which

reflects an 8.7x EV/F2009E EBITDA (fiscal year-end June), which is still

below the industry average of 10.2x EV/EBITDA.



Q3/08 RESULTS



PEER 1 reported Q3/08 results in line with our expectations as revenues grew by 21.0%

Y/Y and 2.5% Q/Q, driven primarily from accelerating revenue growth in the dedicated

server division of 17.1%, offset slightly by slowing co-location growth of 26.1%. Note that

both bandwidth and services also contributed to overall revenue growth but only represent

17% of total revenues. We believe the slowing co-location growth was mainly a function of

a weaker Canadian dollar since a majority of the co-location revenues are in Canadian

dollars, while the company reports in US dollars.



While we had not assumed EBITDA margin expansion in our model for Q3/08, the

company outperformed our EBITDA estimate by 5.6% due mainly to a 560 bps Y/Y

improvement to EBITDA margins and 160 bps above our estimate. Note that Equinix

produces 40% EBITDA margins and PEER 1 management has said that the company’s

incremental revenues currently generate approximately 40% EBITDA margins using its

spare capacity. Therefore, we expect these EBITDA margins to be sustainable despite the

potential for the build-out of new capacity in Toronto and Vancouver over the next few

quarters.



Q3/08A capex of $3.7 million was higher than our $2.7 million estimate, offsetting some of

the EBITDA outperformance, resulting in Q3/08A free cash flow of $2.8 million, in line

with our estimate and Q3/08 EPS of $0.02. By annualizing this free cash flow, we calculate

that PEER 1 trades at a 5.8% FCF yield, despite the company’s 20% revenue growth and

potential for further margin expansion.



Looking for more data centre space in Toronto and Vancouver


Management has indicated that it is actively looking for new data centre space in Toronto

and Vancouver. We estimate PEER 1 could support investments into two new data centres

during 2008 from its internally generated cash flow and by tapping its currently unused

$20 million line of credit. We estimate these two new data centres could provide capacity

for future growth of the company’s Canadian co-location and dedicated server segments,

which are growing at 42.3% and 21.9% Y/Y respectively as of the last quarter ended

December 2007.

Shortage of data centre capacity in Toronto is causing price increases.

With the Toronto telecom hotel at 151 Front St. almost full, customers are looking for

alternative locations. This shortage of capacity in Toronto is driving prices higher for data



centres not only downtown, but also in the surrounding regions. PEER 1 has just finished

filling up its space at 151 Front presumably at the higher prices. The company is looking to

build a new data centre in Toronto. We believe this capacity shortage and the long lead

times required to build new data centres due to power issues bodes well for PEER 1’s

Canadian operations.



VALUATION AND RECOMMENDATION



We derive our 12-month target price of C$2.25 from a DCF analysis, discounting our PEER

1 free cash flow estimates at a 13.0% rate and a 17.5x FCF multiple of our US$23.1 million

F2010E FCF. This results in a US$283.7 million market capitalization that we divide by

130.6 million fully diluted shares outstanding. At C$1.25, the PIX shares currently trade at

6.3x our F2008E EBITDA of $27.1 million, a 45% discount to our C$2.25 12-month target,

which reflects a 8.7x EV/F2009E EBITDA (fiscal year-end June). The 8.7x EV/2009E EBITDDA

multiple of our C$2.25 target price represents a discount to the average multiple of the group of

comparable companies, which currently trades at a 10.2x EV/EBITDA multiple. Therefore,

based on this valuation and our view of improving industry trends, we recommend investors

BUY PIX shares.



Investment risks


• Pricing pressure and customer churn from an increasingly competitive environment

with declining per-unit costs.



• Technological changes that could decrease the value of assets already deployed.



• The purchase price and the integration of potential acquisitions.



• Increased costs of operations such as electricity.

Posts: 9 | From: Vancouver | Registered: May 2008  |  IP: Logged | Report this post to a Moderator
   

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