CanaccordGenuity launches on NexJ Systems

Times are good for Canadian tech IPOs, if the valuation recently achieved by NexJ Systems (NXJ:TSX) is any indication (4.9x trailing revenue, 3.7x current year). Here is a summary of the note put out last week by the research team at CanaccordGenuity:

NexJ Systems

NXJ : TSX : C$8.25 | C$170.0M | Buy, C$11.00

• Running an old playbook with new technology; initiating coverage with a BUY rating and $11 target

Investment thesis

NexJ is a provider of vertical-specific, next-generation CRM solutions. The firm is methodically replacing aging deployments with scalable, private cloud solutions that are tailored to the industries they serve. Management (the former team from Janna Systems, which sold to Siebel for $1.8 billion in 2000) is both reputable and experienced — they are successfully running an old playbook with upgraded technology. While the firm’s perpetual license business model is likely to produce volatile quarterly results, we believe that NexJ is facing several years of 25%+ revenue growth and meaningful operating leverage in a segment that is undergoing a large and long upgrade cycle. For the right investor, we believe NexJ has all of the characteristics to be quite a rewarding investment.

Investment highlights

• Act 2 of a successful management team. The former management team of Janna Systems is together again, led by CEO Bill Tatham. The firm is selling into a familiar customer base — financial services, insurance, healthcare — with new technology and a proven track record.

• Attacking aging technology with a next generation solution. An upgrade cycle is under way in client management software, and NexJ presents a vertical-specific, scalable, private cloud solution.

• Large customer wins provide early validation. Financials services logos such as Morgan Stanley Smith Barney and Wells Fargo Advisors headline a customer base that on average has paid NexJ over $1 million each.

Valuation and price target

Our one-year C$11.00 price target is based on a 4.3x EV/revenue multiple applied to our C2012 estimate of $38 million. This multiple is the approximate average of the CRM/data management company set against which we are comparing NexJ.

MRM