Barclays Capital and Needham & Co. have initiated coverage of Sapiens International NV (Nasdaq: SPNS; TASE: SPNS), a developer of software solutions to the insurance industry, with positive recommendations. Needham gives Sapiens a "Buy" recommendation with a target price of $9, a 33% premium on today's opening price of $6.79 on Nasdaq, and Barclays gives an "Overweight" recommendation with a target price of $10, a 47% premium.
The two investment banks were among the underwriters of Sapiens' secondary offering on Nasdaq two weeks ago, in which it raised $40 million.
Needham analysts Mayank Tandon and Elizabeth Colley say, "We believe Sapiens can grow revenue 15-20% and deliver sustainable margin expansion from a mix shift to higher license and maintenance revenue and operating leverage." They add that the risk-reward is attractive given the 30% lower multiple compared with its peers.
"Global insurance carriers are accelerating the shift from in-house legacy systems to modern third-party solutions to improve their core business processes. This trend is leading to strong demand for Sapiens' one-stop shop software solutions that address the core functions of insurance companies (sell and manage policies, collect premiums, and pay claims). Management estimates the TAM is $25 billion globally and that Sapiens has barely scratched the surface," they write.
Barclays analysts David Kaplan and Tavy Rosner say that Sapiens is an "undervalued IT software company with improving margins and growing markets." They add, "We believe Sapiens' ability to sell to all areas of insurance and investments in sales efforts will lead to organic growth rate expansion in the coming 2-4 years."
"Sapiens has a long sales cycle that leads to steady earnings and low revenue volatility. It faces competition from vendors focused on a single vertical as well as larger software integrators like Accenture plc (NYSE: ACN) and Oracle (Nasdaq: ORCL). The current build out of the R&D and sales teams compressed margins from the mid 40% range to the mid 30% range. The challenge for Sapiens is to come out of this investment phase with higher margins."
The recommendation is based on three main catalysts: improving margins toward the end of 2014 and into 2015, following a period of investment; software development and technology that is displacing legacy systems; and market leadership across the entire insurance vertical.
Published by Globes [online], Israel business news - www.globes-online.com - on November 26, 2013
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