Evertz Technologies Limited (TSX: ET) is an equipment provider to the television broadcast telecommunications and media industries. The Company designs, manufacture and markets video and audio infrastructure equipment for the production, post-production, and transmission of television content.

Key Highlights

• Maintaining track record of rapid innovation: Early research and development efforts allowed the company to establish itself as the leading supplier to the broadcast business, addressing the continuous technical transition to IP and IT-based production. As a result, it has maintained its track record of rapid innovation, serving as a market leader in the rapidly growing Internet Protocol Television ("IPTV") sector and a pioneer in Software Defined Video Network ("SDVN") technology.

• Strong revenue performance: For the first half of FY22, the company reported a 30% y-o-y jump in its top-line supported by a general increase in operational activities across North America and International geographies. Notably, revenue from North America was up by 39% on y-o-y basis to CAD 142.6 million in H1FY22. The management expects the above momentum to continue in the coming quarters, supported by the current industry transition towards IP and Cloud-based solutions, which is expected to enhance the company’s order book

• Sequentially elevating operating matrix: Despite the turmoil period, the Company maintained its pace and witnessed the spirited performance across its revenue, gross profit and net earnings. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. 

  Source: REFINITIV, Analysis by Kalkine

• Consistent dividend distribution:Despite the adverse environment, the company maintained its dividend pay-out, demonstrating its financial soundness and implying that the company is an income investor's friend. The company recently paid a quarterly dividend of CAD 0.18 per share. Furthermore, the stock offered a dividend yield of 5.42% at its last trading price of CAD 13.29, which seems attractive given the present interest rate environment.

Source: REFINITIV, Analysis by Kalkine

• Industry Beating Margins: The management’s solid determination and resilience of business helped them leaping the industry median margins on many fronts in Q2 FY22, which is a key positive. The Chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine

• Improving cash cycle days: The company’s Cash Cycle (Days) has improved compared to the previous sequential quarters, implying the company is taking fewer days to convert its inventory to cash. In Q2 FY22, its Cash Cycle stood at 253.4 days against 273.4 days in Q1 FY22. Although it’s still higher compared to the industry median numbers, but the company is taking prudent steps on improving these numbers on the sequential basis, which is a key positive.

Source: REFINITIV, Analysis by Kalkine

• Healthy D/E ratio: The company reported a lower debt to equity ratio of 0.14x in Q2FY22, as compared to the industry median of 0.26x. A lower debt to equity ratio indicates improved financial flexibility and prudent capital management. Additionally, its % LT Debt to Total Capital is also lower compared to industry median at 10.8% against 13.8% respectively, which is a key positive.
  

Risks associated with investment

Delays in the project execution may lead to a slide in revenue, followed by a lower cash flow. Further travel bans and cancellations of sports events, other live events, and various other related projects may also lead to a fall in the Company's order book. Any continuation of such a trend would affect the Company's financial performance.

Financial overview of Q2 2022 (In thousands of Canadian dollars)

Source: Company Filing 

• Higher revenue: In Q2 2022, the company posted revenue of CAD 107.1 million, increased 7% from CAD 100.4 million in pcp. The growth was primarily driven by higher income from North America, partially offset by lower income from the international segment.
• Slightly improved gross profit: The company reported its gross profit at CAD 61.0 million, improved slightly from CAD 59.6 million in pcp, supported by elevated top-line, partially offset by higher cost of goods sold (CAD 46.1 million v/s CAD 40.8 million in pcp).
• Lower operating profit: On the back of higher operating expenses in the reported period, the company’s operating profit fell at CAD 23.7 million against CAD 28.6 million in pcp.
• Decline in net earnings: The company’s net earnings for the reported period stood at CAD 17.1 million, compared to CAD 21.1 million in pcp, primarily on the back of higher operating cost and lower investment tax credits.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 71.93% of the total shareholding. Magarelli (Romolo) and DeBruin (Douglas A) hold the company's maximum interests at 31.68% each, respectively. The company's institutional ownership stood at 8.45%, and ownership of the strategic entities stood at 64.55%.

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

Analysis by Kalkine Group 

Stock recommendation

For the first half of FY22, the company reported a 30% y-o-y jump in its top-line supported by a general increase in operational activities across North America and International geographies. Despite the turmoil period, the Company maintained its pace and witnessed the spirited performance across its revenue, gross profit and net earnings on the sequential basis, which is appreciable. Furthermore, the IT and cloud industries have had rapid growth in recent years and are likely to maintain their pace as a result of changes in business, shifting consumer tastes, and other factors. Furthermore, business resilience assisted them in leapfrogging industry median margins on numerous fronts in Q2 FY22, which is a significant benefit. Additionally, the stock is offering a dividend yield of 5.42% which seemed attractive given the present interest rate environment. Therefore, based on the above rationales and valuation, we recommend a “Buy” rating on the stock at the current market price of CAD 13.07 at 09:48 A.M Toronto time on February 7, 2022.

One-Year Technical Price Chart (as on February 7, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

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