A KeyBanc analyst's skepticism surrounding the prospects for custom software development company Luxoft Holding Inc (NYSE: LXFT) was allayed amid an abatement in Luxoft's customer concentration.
The top-2 customer concentration at Luxoft is expected to fall from 35 percent currently and a peak of 60 percent in the second quarter of fiscal year 2015 to the mid-20s in the next 12-18 months, Ramnani said in a Monday note. (See Ramnani's track record here.)
The reduction is likely to be achieved on the back of deceleration at top-2 accounts and healthy growth in other parts of the business by the end of fiscal 2019, Ramnani said.
The analyst expects high-potential accounts, or HPAs, to contribute 37 percent of revenue and to grow from 2016's 18-percent year-over-year rate to 50 percent. KeyBanc projects some of the top talent from Deutsche Bank AG (USA) (NYSE: DB) and UBS Group AG (USA) (NYSE: UBS) will be redeployed to its Luxoft's HPAs to propel growth at smaller accounts.
Shares of Luxoft are trading at a significant discount to EPAM Systems Inc (NYSE: EPAM)'s valuation, according to KeyBanc. The firm expects the discount to compress as overall customer concentration reduces.
KeyBanc estimates Luxoft's 2018 revenues at $923.6 million and earnings per share of $2.87, below the consensus. For fiscal 2019, KeyBanc is below-consensus, with revenue and EPS estimates at $1.07 billion and $3.59, respectively.
KeyBanc sees a significant slip at Deutsche Bank or UBS in the near term or a further slowdown in HPAs as the risks to its thesis.
The Price Action
Dragged by a steep sell-off in early August following the release of first quarter results, Luxoft shares are down about 10 percent year-to-date.
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|Dec 2017||KeyBanc||Upgrades||Sector Weight||Overweight|
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