TD Waterhouse initiates coverage of Bridgewater Systems Corp.
(BWC-T) C$2.13
Growing and Profitable Wireless Data Play...Trading for Cash
Event
We are initiating coverage of Bridgewater with a BUY rating and $5.50 target
price.
Impact: Positive
Since its ill-timed IPO in December 2007 (at $5.50), Bridgewater shares have suffered from illiquidity and arguably poor support, and appear to have dropped off the radar screen of investors. The stock now trades at a thin premium over cash (1.1x) despite a history of profitability (four consecutive years) and sales growth (three-year CAGR of 42%, 2008 guidance for 20-30% growth). The company sells access control and policy management products to wireless service providers, and boasts a 65% global market share with CDMA networks. We see a discount price for a growing CDMA franchise plus "free" options for higher growth opportunities in GSM and WiMAX networks. The stock currently trades at just 2.6x trailing EBITDA and 7x forward EPS. Our target price of $5.50 is based on a segmented revenue valuation, and equates to 11x fwd EBITDA and 17x 2009 estimated EPS.
Details
An Ill-Timed IPO and an Orphaned Stock Create the Opportunity. Bridgewater marketed its IPO in Nov-Dec/07. The original pricing range of $7.50-$8.50 per share was cut to $5.50 and the deal size reduced. Poor liquidity (float of 10.4mm shares) and an arguable lack of after-market support (we are now the only dealer with research coverage) have clearly factored into the stock falling off the radar screen. Bridgewater Solutions are Fundamental to Wireless Service Providers. The company sells software that functions as a centralized repository for critical subscriber information, including service entitlements and usage history. Its solutions answer questions such as "does this subscriber belong on the network, is this subscriber authorized to access this content, and what additional services can we sell this subscriber?" The company's network access control products touch 65% of the global CDMA subscriber base.
Why Customers Choose Bridgewater: A Competitive Position Forged From Tier 1 Scalability. All large
network equipment vendors include network access control as a component solution. The issue becomes as a provider rolls out more data applications on the network, each one typically comes with its own subscriber management and access control infrastructure. As the number of services multiply, providers need an umbrella solution to improve visibility/reduce complexity. In our view, Bridgewater has built a sterling reputation as a vendor capable of servicing the demands of the largest tier-1 networks. An Enviable Customer List of CDMA Providers; Now Comes GSM and WiMAX. The company's largest customer is Verizon Wireless (around 30% of revenue) which has been the flagship reference account since 2002. Sprint and Bell Mobility are also among the top five customers. Revenue is just beginning from GSM
customers and WiMAX providers (2% of revenue in 2007), although each is a potentially large growth
opportunity. We see GSM/WiMAX accounting for almost 20% of revenue in 2009. Bridgewater's license
revenue is tied to data subscriber growth and in the future to transaction growth, which continue to be robust.
Potential Catalysts to Watch For:
Tier-1 GSM Customer/Partner. The GSM equipment market is dominated by European vendors. It is
1.
important for Bridgewater to establish a reference customer (we believe this could come by Q4 this year) and for it to establish a strong partner channel (discussions continue with different vendors) Material Initial Deals for the Integrated Solution. Bridgewater will be launching an integrated solution
2.
of software, services and hardware that it will sell as a complete solution. Management expects initial deals possibly this quarter (Q2) with revenue beginning in Q4 of this year. Improving Liquidity. Lockup restrictions expire on June 14 and December 14, which will improve the
3.
float from 10.4mm to 22.4mm shares.
Execution. Current guidance is for 20-30% revenue growth in 2008 and an EBIT margin of 8-12%.
4.
Given that Q1 results (flat revenue and an EBIT loss) were arguably disappointing, it is important for management to build credibility that it can meet the guidance for 2008.
Outlook We are modeling 22.8% revenue growth for 2008, to $48.1mm. This is at the low end of guidance for 20-30% growth. Our EPS estimate of $0.26 reflects an EBIT margin of 8.4%, also at the conservative end of guidancefor 8-12% margins.
Valuation Prior to valuing the earnings power (and Bridgewater has been profitable for four consecutive years), consider that the stock is 1.1x cash value and 0.9x book value (zero goodwill).
Justification of Target Price Our $5.50 target price is based on a segmented revenue valuation. The foundation of our target is a 1x sales multiple applied to the slower growth CDMA business. When added to cash and the present value of the source code license, we see a solid basis of $4.00 per share (88% upside). We expect the combination of GSM/WiMAX revenue to expand from just 2% of revenue in 2007 ($800,000) to almost 20% of revenue in 2009 ($10.4mm). To this revenue, we apply a 4x multiple to our forward 12-months forecast. The implied target valuation of 11x EBITDA and a 6.8% FCF yield is conservative in our mind, given that these multiples would still be a discount to peers, and that our margin assumption is at the low-end of management guidance. |
