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Agilysys, Inc. (NASDAQ:AGYS) posted disappointing revenue in the first and second quarter due to weakness in its TSG group as customers deferred purchase decisions.

We are not surprised that AGYS is facing greater pressure than its peers given its exposure to the retail and hospitality industries, but are puzzled as to why the portion of its business not exposed to these two verticals is performing the weakest. Owing to further weakness in capital spending and soft demand for IT investment, AGYS reduced its fiscal 2009 guidance.

Although there are a limited number of comparable companies, the three most similar trade in a range of 4 to 10 times current year EBITDA and 1 to 8 times next year EBITDA. This range is consistent with the company’s acquisition criteria as it expects to pay approximately 10 times EBITDA for acquisitions. Agilysys' fiscal year that is most comparable with its competitors' current fiscal year is fiscal 2009, which ends in March of 2009.

We believe the company will reach normalized EBITDA margins of 9.0% by fiscal 2010, equal to EBITDA of $3.46 per share. At a multiple of 3 times EBITDA, this gives us a fiscal 2010 valuation of $10.38 per share. If we discount this at a rate of approximately 18%, we arrive at a present value of approximately $7.50. Given the increased risk associated with AGYS achieving its targets, we believe that a multiple towards the low-end of its peer group is appropriate. We therefore set a new six-month price target of $7.50 and maintain a Hold rating.

Source: Another Disappointing Quarter for Agilysys