ET Details

Higher Contribution from the United States is a Key Positive: Evertz Technologies Limited (TO: ET) is a Canadian based company, which offers technology solutions to support multi-channel digital and high definition television along with next-generation Internet Protocol ecosystems. The company’s equipment and solutions offer content to on-demand services, television sets, IPTV, WebTV, and mobile phones and tablets. The company has more than 1,200 employees and has a worldwide existence with offices located in Canada, U.S, U.K, Germany, United Arab Emirates, India, Hong Kong, China, Singapore, and Australia.

 

The Company operates under a single reportable segment, the television broadcast equipment market, which derives its revenues from the sale of software and hardware solutions. The company has a strong global presence with the United States contributing ~63% of total revenues in FY19, up 20% year over year. Revenues from Canada represented ~4% in Evertz’s total sales of FY19, whereas International revenue contributed ~33% of total revenues in FY19.

 

Total revenues for FY19 came in at approximately $444 million, which increased from $402.8 million reported in FY18. The year over year increase can primarily be attributed to the company’s higher revenue from United States/Canada, which increased 18% during the period. In FY19, the company’s net earnings came in at $78.5 million, which increased from $53.5 million reported in the prior corresponding period. Gross margin for the period increased from 55.3% to 57.1%, on the back of foreign exchange gain, driven by the increase in the value of the US dollar against the Canadian dollar. The company also completed the acquisition of Quintech Electronics and Communications Inc., a provider of RF solutions and products, for a consideration of $7.7 million.

 

Looking at the past four-years performance over the period covering FY16 to FY19, the company witnessed a top-line CAGR of ~5.1%. The company aims to generate significant cash from operations and maintain a healthy balance sheet. The company remains on track to deliver significant value to its shareholders through continuous payments of dividends, and investment in new and latest technologies. During the year, the company declared a dividend of $0.18 per share and paid $55.1 million as dividend to its shareholder.

 

Revenue Trend and Dividend (Source: Company Report)

2QFY20 Financial Highlights for the period ended 31 October 2019: In 2QFY20, the company reported total revenue of $119.8 million, signifying a rise of 6.7% from $112.3 million reported in the year-ago period. Revenue were positively impacted by higher contribution from United States/Canada region, which increased 14% on an year over year basis, and more than offset the decline of 10% in revenue from International region. Further, robust adoption of Evertz' new technologies and products were key positives. During the second quarter, net earnings came in at $20.5 million, as compared to $20.6 million reported in the year-ago quarter. The company reported earnings per share of $0.27, which was flat on year over year basis. Foreign exchange loss during the quarter ($1.1 million) was a headwind. Gross margin came in at 57.9%, up slightly from 57.1% reported in the year-ago period, primarily due to higher revenue base. Investments in research and development during the period totalled to $22.9 million, as compared to $21.1 million in the year-ago period.

2QFY20 Financial Highlight (Source: Company Report)

 

Segmental & Geographical Key Takeaways: The Company currently generates approximately 74% of its revenue in the United States/Canada, whereas the remaining 26% comes from International market in the second quarter. Approximately 80% to 90% of the Evertz’s revenues are denominated in US dollars. Notably, revenues from hardware, software solutions, training and commissioning stood at $107.1 million during the quarter. It is worth mentioning, that the company’s top 10 customers accounted for ~49% of total sales during the quarter.

Segmental & Geographical Highlights (Source: Company Report)

 

Balance Sheet & Cash Flow Position: As at October 31, 2019, the company had a cash and cash equivalent of $5.4 million. Working capital for the quarter stood at ~$222 million, reflecting strong financial performance. Long-term debt at the end of the quarter came in at $0.107 million. Total dividends paid for the quarter amounted to $83.4 million.  During the period, management declared a regular quarterly dividend of 18 cents per share.

 

Operating cash outflow for the year stood at $12.9 million, as compared to the operating cash outflow of $7.6 million in year-ago period. Net cash inflow from investing activities amounted to $1.8 million, and financing activities during the year led to an outflow of $81.9 million.

Cash Flow & Liquidity Highlight (Source: Company Reports)

Recent Updates:

On 15^th January 2020, the company announced it has been awarded a “Technology and Engineering Emmy” Prize from the National Academy of Television Arts and Sciences, establishing Cloud Based Linear Media Supply Chain Technology.

On 5 December 2019, the copmnay announced that the CFO of the copmany Anthony Gridley will step down from his post, effective from 31 December 2019. Doug Moore was immediately appointed as the CFO of the company post his resignation. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 71.29% of the total shareholding. DeBruin (Douglas A) and Magarelli (Romolo) held the maximum number of shares with a percentage holding of 31.46%, each, respectively, followed by QV Investors Inc., with a holding of 3.12%.

 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company had an Gross margin of 57.1%, up from the prior corresponding period margin of 55.3%. The margin has seen an improvement over the last four years period covering FY15 – FY19, with FY15 gross margin at 56.7%. EBIDTA margin also improved over the year with FY18 and FY19 margin at 21.3% and 25.1%, respectively. Net Margin of the company was reported at 17.7%, depicting an improvement on the prior corresponding period margin of 13.3%. The company has debt-to-equity ratio of 0.00x, demonstrating a sound financial position.

Key Metrics (Source: Thomson Reuters)

Outlook: Going forward, the company remains positive on the ongoing technical transition in the industry and making investments to establish itself as a leading player.  Additionally, the ever-increasing adoption of Evertz' IP-based Software-Defined Video Networking solutions, along with its cloud-based virtualized solutions, and the immersive 4K Ultra-HD solutions is likely to generate healthy earnings in the near-term.

The rapid progress in video as well as various bandwidth-demanding products, are compelling companies to invests in LTE, broadband and fiber, which in turn will offer further momentum to capacity and ramp up to Internet and wireless networks. As a result, these companies are undergoing technical transition to meet the increasing demand for flexible data, video, voice and IP solutions. Higher focus on leveraging wireline impetus, escalating media coverage, enhancing customer experience and improving overall cost structure are key growth factors.

The forthcoming 5G boom is likely to boost the industry to newer heights. In order to enable the service providers to hasten time to market, enhance customer satisfaction as well as reduce overall overheads, some of the companies offer a complete portfolio of maintenance, turnkey network execution, maintenance, integration and managed services. This complete growth model bodes well for the overall advancement of the industry and enables service providers to continue introducing solutions to meet the rising requirement for bandwidth.

We believe that afore-mentioned factors would enable ET to outpace industry growth. The company expects that its gross margin may vary subject to the products sold, it’s accomplishment in winning more complete projects, utilization of manufacturing capacity and the effectiveness of the pricing environment. Research and development will be a key focus area, as the company continues to invest in new product development.

 

Key Valuation Metrics (Source: Thomson Reuters)

 

Valuation Methodology:

Method 1: Price to Earnings Multiple Approach

Price to Earnings Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Amid steep sell-off in the market across the board, shares of ET still delivering a positive price return of ~6% on a YoY basis, however, over a month time its shares are tracking the broader trend and delivering a negative price return. The 14-day and 9-day Relative Strength Index hovering in an oversold zone, indicating a pull-back could take place in the near-term.

Also, from an income investor points of view, its shares are offering a decent dividend yield of 4.4%, which is approximately 70bps higher against the TSX 300 Composite Index’s dividend yield of 3.7%, with consistent dividend payment track record over the past five years.

We have valued the stock using relative valuation method, i.e., P/E multiple, and for the said purpose, we have considered peers like EXFO Inc (TO: EXF), BlackBerry Ltd (TO: BB), CGI Inc (TO: GIBa) and Sierra Wireless Inc (TO: SW). Therefore, we have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the closing market price of $16.35 per share, down ~ -0.20% on 06 March 2020.

1-Year daily price chart (as on Mach 06, 2020). Source: Thomson Reuters.

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