Versant Partners note on MKS / BMC deal

Not all of the news in small cap tech land is bad. This research note on Wellington Financial Fund I portfolio co. MKS Inc. (MKX:TSX) comes from Versant Partners. As MKS demonstrates by this BMC reseller deal, there are still ways to grow your revenue pipeline, even during a deep recession:

“EVENT

MKS announced this morning that it has signed a reseller agreement with BMC Software (BMC/NYSE).

BOTTOM LINE

We are raising our estimates and our one-year target to C$2.40 (from C$2.10) and maintaining our Buy recommendation. We believe that this
reseller agreement will have a material impact on MKS’ revenue and could ultimately (although not in the near-term) lead to BMC acquiring the company. The stock is well supported by a ~9% dividend yield, an aggressive stock-buyback and an attractive valuation.

FOCUS POINTS

– BMC is a leader in Business Service Management (BSM), providing a unified platform designed to facilitate process integration and a business service view of IT management. MKS’ Integrity solution is an
excellent complement to BMC’s offerings.

– BMC has a market cap of $5.7B. In F2008, it had revenue of $1.8B and earnings of $400M.

– We believe BMC will share in a meaningful portion of BMC-led license sales and to a lesser extent maintenance revenue with this agreement.

– Current valuation is as attractive as any in our coverage universe: 0.5x F10 EV/Revenue, 3x F10 EV/EBITDA and 6x F10 P/E.

– Our target of C$2.40 (up from C$2.10) is based on 8x EV/F2010 EBITDA. This equates to 11x F2010 earnings.”

MRM
(disclosure – I own MKX)