Genuity initiates on Bridgewater Systems

Canada’s top-ranked tech analyst, David Hodgson, came out with buy on Bridgewater (BWC:TSX) today. Target of $6.50 versus a $5.50 December IPO price. Stock’s at $4 today.

“We are initiating coverage on Bridgewater with a BUY recommendation and a $6.50 price target. This represents 15x our F2009 EPS estimate and 12x EV/EBITDA based on our F2009 estimate. Post offering, we estimate net cash comprises approximately 40% of the current market capitalization. We believe Bridgewater is an inexpensive way for investors to play the growth in network convergence, devices, and mobile data applications.

· Bridgewater has been growing at a 43% CAGR and has delivered profitability for the past 14 quarters. Its revenue growth has been mirroring the growth in mobile data ARPU and mobile data subscribers. We assume growth of 33% and 18% in F2008E and F2009E, respectively.

· Recent trends would point to further consolidation within the marketplace. GSM-centric and Bridgewater-comparable Apertio, with 2007 revenue of approximately $40-41 million, was recently purchased by Nokia-Siemens for $205 million, or 5x sales. With a leading position in CDMA, WiMAX, and IPTV, we believe Bridgewater could make for an interesting acquisition candidate for the likes of larger OEMs, telecom billing firms, or DPI vendors, to name a few.

· It is important for Bridgewater to establish greater traction with Tier 1 carriers in the large GSM market, and we would expect to see some evidence of this traction before the end of the calendar year.

· We are forecasting considerable operating leverage in both F2007 and F2008, with operating expense growth lagging revenue growth considerably. Our operating margin assumptions, we believe, are reasonable, at a modest 14.4% in F2009. This incorporates the effects of growing turnkey revenue, beginning in late calendar 2008.

· On a 2008 basis, the peer group trades at 2.6x EV/sales and 22x EPS, compared to BWC at 1.1x EV/sales and 12.1x EPS. We believe strong Q4/07 results and a positive outlook for 2008 will narrow this gap materially in the coming months.”

MRM