Needham: Conduent Could Net $175-450M With Business Divestitures

Conduent Inc CNDT, which was spun off from Xerox Corp XRX in 2017, was upgraded by Needham on Tuesday, with the sell-side firm expressing confidence in Conduent's turnaround. 

The Analyst

Needham analyst Mayank Tandon upgraded shares of Conduent from Hold to Buy and set a $25 price target. 

The Thesis

After divesting five non-core businesses in 2017, Conduent suggested more divestments are in the offing, analyst Tandon said in a Tuesday note. Based on past divestitures, the company could net pre-tax proceeds of $175 million to $450 million, the analyst said.

The proceeds could be used for reducing leverage and/or pursuing acquisitions, Tandon said. With $300 million in cash on its balance sheet, and more expected as it pursues divestitures, Conduent could make an accretive acquisition or two in the second half of 2018, the analyst sauid. 

Conduent has a net leverage ratio of 2.1x and Needham estimates its weighted average debt cost at 6.5 percent, including a $510-million bond with a 10.5-percent rate that's due in 2024. 

In light of the high borrowing costs, deleveraging is a "clear positive" for the company, Tandon said. 

"Paying down the higher cost debt early would trigger one-time make-whole premiums, but would materially improve cash flow." 

For 2020, Needham forecasts an EBITDA margin of 14.5 percent and earnings per share of $1.35 for Conduent. The estimates are conservative, with potential deleveraging and divestment of lower-margin business likely boosting earnings power, Tandon said. 

Conduent's valuation is at trough levels, with the company's turnaround efforts likely providing a catalyst for higher valuation in the coming quarters, the analyst said.

The Price Action

Conduent shares are up about 23 percent over the past year.

At the time of publication, the shares were up 1.78 percent at $19.74. 

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Photo courtesy of Conduent.