Westwind initiates on Espial

Despite not being in the 2-dealer IPO syndicate (GMP and Genuity were co-leads and the sole underwriters), Westwind Partners has just launched coverage on Ottawa-based IPTV story Espial (ESP:TSX). Espial went public at $7/share in a $25MM deal in June (see post “Espial gets it done“, June 4-07), and enjoyed a quick run above $9. GMP traded it like water (see post “Espial trading stats tell a story“, June 22-07), at least as much as one can do with a 3.57MM share offering.

Westwind’s research analyst had the sense to wait until post Labour Day for folks “to be back” to publish his work, and luckily missed the bad first quarter out of the gate that Espial wrought on its new shareholders. Nevertheless, IPTV is hot, and Westwind is right to spend time on the space.

Our assessment of the IPTV market indicates that Espial is one of a handful of leading IPTV software vendors. Espial’s strong balance sheet supports its commitment to product development, which we view as the key catalyst to driving higher revenue per subscriber.

Macro outlook for IPTV is positive with current penetration below 3%. Telcos are expected to invest significant capital in IPTV infrastructures over the next decade. Global IPTV subscriber growth is forecast to grow close to 100% per year through 2011. We believe that Espial’s
solutions will address a market opportunity of US$400 million–US$1 billion by 2010.

Espial is well positioned to participate in industry consolidation. We believe that Espial’s open and modular software solutions make it an attractive acquisition candidate for a number of vendors.

Opportunity to invest at pre-IPO levels. After the recent market downturn, Espial’s stock has fallen below its $7.00 IPO price. Investors with a time horizon greater than one year should
review this investment opportunity.

We are initiating coverage on Espial Group Inc. with a BUY rating and a one-year target price of $9.00 per share.

MRM