Company: Boxlight (BOXL)
STOCK RATING UPGRADE: BUY (prior HOLD)
Price Target: $5.13 (prior $2.13) +178% Upside
Market Price: $1.84
Research Publication Date: 1/12/21
Boxlight (BOXL) continues to buck the trend in an environment where education stocks have suffered due to a transition to online learning, and hybrid learning environments. We anticipate that there are a number of key catalysts that differentiate the bull vs. bear thesis on the stock, as the company has been able to demonstrate positive financial impact from the passage of additional stimulus funding. We anticipate that BOXL can win more contracts with their Texas School District contract adding organic top-line growth despite the difficult business environment.
Recent News: Boxlight announced on January 6th the completion of its phase 1 rollout of 615 Clever Touch Displays, and that in FY’21 and FY’22 the number of Clever Touch displays sold to the Texas School District will increase to 1,200 installations per year. This translates to some of that pull forward demand from a hastened rollout to hybrid learning environments. The contract will generate $5M in revenue over the two-year term with each Clever Touch Display selling at an ASP of $1666. We anticipate that the revenue impact was $1.025M in FY’20, with the contract generating $2M in FY’21 and FY’22.
Keep in mind, this is somewhat impactful to the core
hardware business, where we forecast that Boxlight will report hardware revenue
of $27.686M FY’20 (excl. Sahara Presentation Systems), which translates to the
Texas School District contributing 6%-7% of sales tied to Boxlight specific
products, i.e. Clever Touch Displays in FY’21. This diminishes some of the
concerns tied to the core hardware business, as the company is positioned to
pull-forward some demand, while also solidly positioned to win additional
school district contracts.
Estimate Update
We increased our Q4’20 revenue estimate from $26.2M to $26.7M, whereas our Dil. EPS loss for the quarter remains at $(.01) loss. We’re below consensus estimates of $26.98M by $180K, and we’re above consensus expectations on Q4’20 Dil. EPS of $(.02) by 1 cent. We also update our financial model for FY’21 where we provide an FY’21 revenue estimate of $136.97M, which is +$3.82M above consensus expectations. Our FY’21 Dil. EPS loss estimate of $(.01), which is 5 cents below consensus expectations of $(.04). The discrepancy in bottom line estimates ties into a more conservative outlook on other expenses versus consensus, and the expectation of some dilutive impact from debt/share conversion, or secondary offerings.
Valuation Update
We anticipate that investors may have discounted the growth thesis, and accretion potential from its recent merger with Sahara Presentation PLC. Furthermore, the stock is heavily undervalued at present multiples, which suggests that absent of a more cataclysmic scenario, investors are well positioned to buy on solid fundamentals, and valuation. However, we also want to highlight that there are key risks in this business environment that may diminish the scope of upside, as mean value reversion is conditional on liquidity flows returning to risky assets, and macro headwinds tied to COVID-19 are more subdued than what experts currently anticipate.
As such, we are increasing our valuation estimate from $2.13 to $5.13 and limit our expectations on multiple expansion due to the risks of another U.S. lockdown, or the emergence of additional lockdowns across rest of world.
U.S. K-12 Outlook Improves
What differentiates FY’21 vs. FY’20 is the timing of negative headwinds, and the heightened likelihood that school districts will have much more funding (from the passage of a 3rd stimulus bill in either February or March), and the population of vaccinated individuals will reach a high enough of a point where more school districts may reopen in the Fall Semester of 2021. However, even in a more adverse scenario – some districts may opt for a Spring 2022 semester reopening, which would still fall within a reasonable timeline for Boxlight to ramp-up sales and pull forward demand from the more depressed 2020 school year.
Furthermore, we have seen that as part of the re-opening efforts, Universities, and School Districts in the U.S. have signaled a transition to a hybrid environment by Fall Semester 2021. This implies that with pre-existing contracts more heavily weighted towards FY’21 and FY’22, and the anticipated upside from merger accretion, and organic topline growth – the stock is positioned to deliver stronger financial results.
We adjust some of our revenue model to reflect some of the budget growth in education, where California school funding will increase from $70.9B to $88.1B in the FY’21-FY’22 school year representing 24.2% y/y budget growth for education. In Arizona, school funding will increase from $5.2B to $5.67B representing 9.1% y/y budget growth due to the passage of education funding from the November elections similar to California.
Whereas other States like New York projects a funding decline from $27.8B to $26.78B or -3.7% y/y. Keep in mind, the New York budget estimate excludes the impact from the $54B in added stimulus on a Federal Grant level from the recently passed $900B stimulus bill. With more of the funding going towards States with higher budgets. Some States have not provided a FY’21 forecast, with Texas still deliberating over its upcoming annual budget given the $4.6B budget deficit. There could be budget cuts in Texas, which could be offset with $54B from December stimulus funding, which could bridge some of the shortfall on education funding. Keep in mind, Boxlight already has pre-existing contracts in Texas, so the budgetary impact on education is less meaningful.
The divergence in education budgets ties into the differences in funding measures that were passed on a State-by-State legislative level. But, with budgets set to increase due to the passage of added stimulus, and the added grants for technology and virtualized environments we think mid/high-single-digit growth on aggregate U.S. funding levels seems probable. In other words, the more difficult selling environment is likely to improve, and with emphasis on hybrid-learning environments a key to transitioning e-learning back into the classroom. We think Boxlight has a number of opportunities to execute on new sales contract growth, as investors also digest the impact from the merger with Sahara Presentation Systems.
European Education Budgets Improve as Well
Given the bulk of revenues have transitioned to overseas via the Sahara Presentation PLC Systems acquisition. We also examine the budget outlook in both the UK and the European Union. In the United Kingdom, the budget increased to £94.3B for 2021 vs. £92.4B in 2020 representing a 2.1% increase. We anticipate that this growth in funding will positively impact K-12 sales in the region.
In terms of the European Union the EU passed a stimulus
package of 1.8 Trillion Euro on December 16,2020. Though the breakdown on
school specific funding was not specifically outlined it was reported in news
outlets that 16 billion Euros will be allocated to health, education, and
security. Keep in mind, education is funded on a governmental level on an EU
member state by state basis with increases in budgets likely for the 2021 year.
Its’ worth noting however that K-12 education in the
European Union is less affected by COVID-19 than the United States, as schools
remained open during the December COVID-19 outbreak.
Financial model
Source: Cho Research
We’re providing our estimates for FY’21 where we anticipate some strong organic growth across the Boxlight business and anticipate $102.36M revenue contribution from Sahara Systems PLC. We anticipate some added upside from FX impact, as the division reports revenue in terms of GBP (British pounds).
We believe consensus expectations on topline revenue are rather conservative given the scope of revenue upside tied to new contract wins in both K12 education and corporate displays. We think some of this upside could translate through FY’21, as budgets across the United States and Rest of World normalize and continue to grow. When combining all reporting segments, we anticipate revenue of $136.972M which is above consensus, though we believe we are conservative and likely below management guidance for FY’21 when they report results on Q4’20 results.
This being said, the reason we are below consensus expectations on Dil. EPS has much to do with our other expense figures, which we anticipate some negative headwinds tied to the financing cost of the debt convertible, and eventual share dilution from the convertible impact, or additional secondary cap raise, where we anticipate a 15.8% increase to share outstanding. The pace of dilutive impact will slow when compared to prior year.
We also exclude the FX computation, as we anticipate that
the FX impact will be factored into the topline revenue figure, and that
inter-segment reporting will likely change when compared to prior year when
Boxlight reports Q4’20 earnings.
Valuation Model
Source: Cho Research
We value the stock on the same forward sales multiple as
prior year given the prospects of potential headwinds in the business environment.
However, we think the converse scenario of higher multiple and revenue
surprises could result in price target increases down the road.
We provide a $5.13 price target, even when factoring the impact from added dilution, and anticipate that the stock will likely trend higher heading into the next quarterly earnings report. The negative bias towards education-tech will likely improve over the course of the year, and assuming the valuation does start to normalize we could see room for more upside.
That being said, our valuation is in-line with the consensus median PT of $5. We believe consensus estimates are mostly attainable, and given the small cap nature of stocks, there’s certainly room for more upside. Of course, our price multiple is lower vs. consensus whereas our revenue estimate is higher.
Source: Google
The stock is starting to form a trend, or what is known as a sideways consolidation breakout pattern on the charts. This is mostly driven by stronger business fundamentals and expectations on a 3rd round of stimulus funding, which could further bolster U.S. K-12 school budgets in the upcoming calendar year. We anticipate that the stock will trade higher heading into its next quarterly earnings announcement, though the upside tied to the announcement will not be fully priced-in given the depression of price multiples across the entire education stock space.
Even so, the stock seems poised for a strong rebound with near-term resistance levels at $2.00, $2.50, and $3.50. We think the valuation can be supported at much higher levels, though its worth keeping in mind the hectic news environment tied to politics and macro.
Final thoughts
Investors should buy Boxlight heading into its upcoming quarterly earnings report, as we think the stock is now substantially undervalued with price momentum returning to the stock. The impact from prior dilution is starting to stabilize quicker than expected, and with expectations of dilutive events more subdued, and the post-merger accretion not priced-in, the stock trades higher from here.
As such, we have revised our recommendation from HOLD to BUY and raise our PT to $5.13. We anticipate +178% upside over the next 12-months and would not be surprised if the stock performed even better on the basis of sales/earnings surprises, announcements tied to contract wins, U.S. stimulus funding, and guidance revisions.
Disclosure: Cho Research was not compensated by Boxlight to publish “Boxlight Raising Price Target to $5.13 a Big Upgrade”Though Cho Research does use the research dollars it generates from other clients of our research service to fund market research
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