Cloud Focus Lets Canada's Top Stock Float Above Commodity Fray

  • Kinaxis is leaner than tech darlings Shopify and Hootsuite
  • 147% increase makes Kinaxis best performer over C$1 billion

In a stock market where everything’s going wrong, Kinaxis Inc. is doing everything right.

The Canadian cloud software company has surged 147 percent this year, the best-performance among 232 companies with market values of more than C$1 billion ($737 million). That’s in contrast to the 12 percent plunge in the nation’s benchmark equity gauge, which has been pummeled by a commodity rout.

While Canadian factory owners struggle with globalization, Kinaxis is feeding off the trend by selling software to help companies manage their increasingly complex global supply chains. It’s nipping at the heels of larger rivals such as Germany’s SAP SE and has an important advantage over other Canadian tech darlings like Hootsuite Media Inc. and Shopify Inc.: it’s forecast to make a profit this year.

“We’ve always cared about profitability,” John Sicard, 53, chief product officer and soon-to-be chief executive office of the Ottawa-based company said in a phone interview. “Call us old fashioned.”

Kinaxis has been around since the 1980s and rolled out the product that has become its prime supply-management application -- RapidResponse -- in the 1990s. The tool helps multinational corporations simulate changes to their supply chain and figure out the best way to respond if, for example, a customer doubles an order unexpectedly.

Poster Child

Since its stock market debut in June 2014, the company has posted revenue growth every quarter except one. Sales are forecast to rise 28 percent in 2015 and adjusted profit 79 percent, according to estimates compiled by Bloomberg. All seven analysts who rate the company say buy it for an estimated 18 percent gain from its close of C$45.74 on Wednesday. It’s already more than tripled from its initial public offering price of C$13 per share. The stock rose 1.2 percent to C$46.30 at 11:13 a.m. in Toronto.

While policy makers have been puzzled by Canada’s faltering manufacturing exports even as the currency has weakened, companies like Kinaxis that rely on intellectual capital may be the way of the future, according to Benjamin Tal, an economist at CIBC World Markets. Canadian factories have shed about 600,000 jobs since peaking in 2002 with little sign of a pick-up even as the Canadian dollar has declined by 15 percent over the past year.

Takeover Target

“Manufacturing lost capacity and the new capacity that will emerge will be a very different capacity that we will not be able to measure,” Tal said in a telephone interview. He said it will be valued-added “and in many ways be invisible.”

Investors are already betting on the trend, driving the S&P/TSX Information Technology Index to a 12 percent advance this year. Kinaxis has led the pack, as investors put a premium on its profitability. The company employs just over 300 people, compared with 700 for Hootsuite, the Vancouver-based social media startup that’s been touted as an IPO candidate, and Shopify, a cloud-based commerce company with more than 500 workers, according to its website.

The prospect of an eventual takeover by a larger tech company like SAP or Oracle Corp. has helped boost the stock, Robert Young, a Toronto-based analyst with Canaccord Genuity said by phone.

“They’ve done a very good job of winning mandates over SAP,” he said. “They’re taking away software as a service revenue.” Kinaxis is too small to cause its bigger competitors any real problems right now, but if it keeps growing and eating into their market share it could become a takeover target for SAP, Young said.

A spokesman for SAP declined to comment.

Communication, Simulation

Sicard said his company’s advantage over competitors including SAP is the design of his software, which has a focus on communication and simulation.

“I don’t believe we actually compete with them on product,” said Sicard, citing his company’s ability to simulate situations. “Their products can’t do at all what we do.”

While a takeover from a larger competitor is possible, so is the prospect of SAP or Oracle building out a product to more directly compete with Kinaxis, said Bruce Campbell, a fund manager at StoneCastle Investment Management in Kelowna, British Columbia, which has owned the stock since May.

“They’ve come from not even showing up on those guys’ radar screens to now all of a sudden I’m sure there’s a few sales guys that are like, ‘Oh man, Kinaxis just took another deal from us’,” Campbell said.

Margin Pressure

That possibility of increased competition and Canadian investors moving their money back to energy stocks on a rebound from its slump are risks Kinaxis is facing, Campbell said. He still sees the company growing for three to four years though.

The company’s plans to keep posting growth include building out a “partner ecosystem” with consulting companies like Accenture Plc, Sicard said. That will put pressure on margins in the short term, but profitability will still remain an objective, he said.

“We’re going to govern ourselves the way we’ve always governed ourselves,” Sicard said.

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