Description

Ekinops (EKI.FP) is a French optical player that has shown solid revenue growth and EBITDA margins but has not been appropriately rewarded in the stock market.  The company sells optical transport gear and access equipment to a mix of Tier-1 and Tier 2/3 carriers in a variety of geographies.  While strongest in France, with its large customer, Orange, the company also has international business with recent wins in Switzerland and Canada with Tier-1s Swisscom and TELUS.  Business was flat in 2020 due to the pandemic, as customers could not access their offices to install equipment, but grew 12% in constant currency in Q1 2021 and the company is forecasting double-digit revenue growth for 2021 as a whole.  The business trades at a discount to Ciena, its closest competitor and in-line with Infinera, which is a bottom-line challenged US competitor.  Ekinops has an enterprise value to revenue (EV/R) ratio of 1.4x on 2022E revenue whereas Ciena trades at 2.2x and Ekinops is forecast to grow faster than Ciena this year and in the future.  Given Ekinops’ growth and margin expansion prospects, I think a 3x multiple is appropriate which would lead to a €13.60 stock or about 100% upside from here.

Ekinops began life as an optical transport company but widened its product range with the large acquisition of OneAccess Networks in 2017.  The company’s original products included the ETS12_SR-12SA optical transport switch and the PM_600FRSO6 Transponder.  These products are used to transport optical signals from short ranges within data centers to long ranges spanning hundreds of miles.  Ekinops products are unique in that they are designed for the Tier 2/3 carriers with a lower price point than Ciena and with functionality suited to these smaller customers.  This has not prevented the company from doing business with larger Tier 1s but the products’ unique feature sets and lower price point set them apart from Ciena and Infinera which are targeting very full-featured (and expensive) products for the AT&Ts and Verizons of the world.  Tier 2/3 business in the US is picking up due to subsidies from the Connect America Fund which is an effort in the US to upgrade broadband connections in rural areas.  Some utilities are also now beginning to offer broadband services to customers and these players are prime targets for Ekinops’ transport devices.

OneAccess brought Ekinops products for the edge of the network, for use in branch offices of enterprises.  These products include ethernet access devices, voice and data routers, and universal customer premises equipment (uCPE).  OneAccess is a leader in network function virtualization (NFV) where it can host a variety of functions in one access box.  According to customer wishes, a uCPE box can host a network router, firewall, and SD-WAN (software defined wide area network) function all in one hardware device or any combination of those functions.  Instead of having separate hardware devices for each of those functions, they can be combined in one box.  This is the future of edge networking and Ekinops is well positioned here. 

SD-WAN is a rapidly growing function now.  It allows customers to access the Internet in a cheaper and more efficient way than they used to using MPLS (multi-protocol label switching) lines from the carriers.  Independent software and hardware companies are entering this market and this is a threat to the carriers’ lucrative MPLS business.  Different carriers are reacting in different ways.  Some are ignoring this trend while others are developing their own SD-WAN products to attack this market.  Ekinops provides the SD-WAN solution for carriers to white-label and enter this market.  Recent wins with Swisscom in Switzerland and TELUS in Canada show that this strategy is beginning to pay off.  SD-WAN competitors include Versa Networks, Velocloud (purchased by VMWare) and Viptela Networks (purchased by Cisco).  These large players sell directly to enterprises and compete with the carrier offerings that Ekinops enables.  While carriers in the US such as AT&T have been aggressive in rolling out their own SD-WAN offerings, carriers in Europe have lagged and present prime targets for Ekinops SD-WAN software.

Management at Ekinops is solid.  Didier Bredy is the company’s CEO and has been in this spot since 2005.  Prior to leading Ekinops he was the General Manager of the software and services business of Ingenico, a leader in secure transaction and payment services.  The company hired a new chief technology officer in September 2020.  Vincent Muniere comes from Altice where he was most recently SVP, Network & OSS (Operations Support System) Engineering managing a team of 900 people.  Having a high-level CTO adds credibility to Ekinops’ technology leadership.

In 2019, Ekinops had revenue of €93.5 million, which represented growth of 11% from 2018, and EBITDA of €15 million, for a 16% EBITDA margin.  Sales in 2020 were affected by the pandemic but the company managed to generate roughly flat sales with 2019 levels and €14.8 million in EBITDA for a 15.9% margin.  These results were impressive compared to Ciena which shrunk 4% in calendar 2020 and is expected to only grow 2% in fiscal 2021.  Infinera was able to grow 3% in 2020 but is only expected to grow 5% in 2021.  Ekinops it taking market share in this market but is not recognized as such given its low visibility to US investors.  There are no US investors in Ekinops top 20 holders and no US analysts cover the company.   I am expecting Ekinops to grow revenue 11% this year and 12% next year.  EBITDA margins should expand to 16.5% this year and 18% next year.  The company has operating leverage with 55% gross margins and slowly growing operating expenses below the gross margin line.  There is an opportunity for the company to grow faster than my estimates givens its position in the rapidly growing SD-WAN market but I will leave that out as potential upside to the model.  On those numbers the company is trading at a 1.4x enterprise value to revenue multiple in 2022 and a 7.9x enterprise value to EBITDA multiple that year.  With a 3x EV/R target Ekinops’ stock should trade to €13.60 or roughly a double from current levels.

Catalyst

Continued revenue growth and EBITDA margin expansion should lead to multiple expansion