COVID-19 pandemic took a toll on the economies across the globe. COVID-19 pandemic forced the governments across the globe to take unseen measures to contain the spread of the virus, which include country wide lockdown, temporary closure of businesses and industrial activities, travel restrictions and so on. Consequently, equity markets across the globe witnessed the worst free fall in a decade. However, amid the current challenging environment, Technology stocks stood resilient as these are helping the business in sustaining the current below by providing tech driven business solutions.

Tecsys Inc

Tecsys Inc is engaged in the development and sale of enterprise supply chain management software for distribution, warehousing, transportation logistics, point-of-use and order management. It also provides related consulting, education and support services. 

Recently, the Company reported the addition of a new client, named Mary Washington Healthcare. The Company will provide intra-network deliveries, automate supply management and streamline case management across more than fifty branches of the client. The above solutions include a combination of enabling software, RFID and barcode technology, mobile devices and embedded UIs.

Q3FY20 Financial Highlights: TCS impresses with its quarterly numbers, and posted total revenue of CAD 26.84 million, as compared to CAD 18.79 million Q3FY19. The increase was majorly driven by revenue growth from cloud, maintenance & subscription segment, professional services and third-party products. Gross profit stood higher at CAD 12.83 million, against CAD 9.44 million in the previous corresponding quarter, thanks to the considerably elevated income. The Company reported profit from operations at CAD 1.39 million, as compared to a loss of CAD 1.69 million in pcp. The increase was primarily attributable to higher gross profit, a slide in the general & administration expense, partially offset by higher sales & marketing expense and increased research & development expense.  Net profit, during the quarter, stood higher at CAD 0.83 million, against a loss of CAD 1.43 million in the previous corresponding period. The Group exited the quarter with total assets of CAD 95.65 million and cash & cash equivalents of CAD 11.95 million. The Company reported total contract value bookings at CAD 29.9 million during the quarter, as compared to CAD17.1 million in the previous corresponding quarter while SaaS subscription bookings of CAD 2.0 million were added in Q3FY20, as compared to CAD 0.5 million, a year ago.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company earns a portion of its revenue in USD. Any fluctuation in the exchange rate would hamper the group’s performance. Further, the discontinuation of services by any client would hamper the company’s performance.

Valuation Methodology: EV to Sales Based valuation metrics (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations: The stock stood resilient in the recent past and appreciated ~12% so far this year. Investors should know that the stock has closed above its 200-days simple moving average of CAD 19.32, indicating a bullish pattern. The Company reported total backlog of CAD 98.2 million on January 31, 2020, improved from CAD 87 million on October 31, 2019, which is commendable. A solid backlog provides greater visibility to the revenue. Further, the group is focusing on recurring revenue, which is encouraging. Annual Recurring Revenue reached CAD 42.5 million in Q3FY20, higher than CAD 32.7 million in pcp, which reflects the Company's ongoing focus on the transition to a SaaS revenue which should result in a stable revenue going forward. Recurring revenue provides stability to the cash flow. We have valued the stock using EV/Sales-based relative valuation method and have arrived at a target upside offering single (in percentage terms). For the said purposes, we have considered industry median (Software & IT Services) on NTM basis. Hence, considering the aforementioned facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 24.01 on June 26, 2020.

TCS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Computer Modelling Group Ltd

Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry.

FY20 Financial highlights: Computer Modelling came up with a decent set of results, wherein the Company posted an improved revenue of CAD 75.78 million, as compared to CAD 74.85 million in FY19. The increase was driven by higher revenue from professional services and annuity/maintenance licenses segments, while lower-income from perpetual licenses remained a drag. Operating profit stood at CAD 31.75 million, as compared to CAD 29.55 million in pcp, thanks to higher revenue. The Company reported improved product pricing and posted an operating margin of 42%, against 39% in the previous financial year. EBITDA improved to CAD 36.11 million, as compared to CAD 31.51 million in pcp, aided by the strong operating performance. Net income for the year stood higher at CAD 23.48 million, compared to CAD 22.13 million in FY19. Free cash flow grew to CAD 26.54 million from CAD 24.85 in FY19.

FY20 Financial Highlights (Source: Company Reports)

Risks: Due to high dependency on oil and gas clients, adverse effect on crude oil demand can hit revenues of the company. Lower demand for crude oil would result in lower drilling activity by the oil manufacturers resulting in lower budget allocation for the software and maintenance purposes.

Valuation Methodology: EV to EBITDA Based valuation metrics (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations: Due to the sharp decline in the equity markets on account of weak investor’s sentiment due to ongoing COVID-19 pandemic, the stock corrected ~45%, so far this year. Despite certain headwinds within the software license segment during the fourth quarter of FY20, the group exited the financial year with a positive note in terms of revenue, profitability etc. which is impressive, looking at the ongoing downturn. The Management took prompt measures to encounter the current challenges and lowered the salary and compensations of the employees, in order to retain liquidity. During the recent quarters, the company witnessed improvement in annuity & maintenance revenue while the performance of the perpetual licensing segment continues to struggle due to lower drilling activities by the oil companies. We believe the perpetual licensing revenue would likely to improve in coming quarters due to recovery in oil demand in the coming days. The stock witnessed a pullback rally and appreciated ~7% in the last one month. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered industry median (Software & IT Services) on NTM basis. The group has delivered a decent result and took prudent measures to manage cost amid the challenging time. However, the group is serving the oil & gas industry, which is going through a pain owing to lower demand in the past few months. Though the demand recovery is coming, it is still not close to the pre-pandemic level. Hence, considering the aforementioned facts and risk involved, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.49 on June 26, 2020.

CMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Open Text Corporation

Open Text Corporation (TSX: OTEX) enables organizations to gain insight through market-leading information management solutions, on-premises or in the cloud. 

On June 25, 2020, OTEX informed that Rapid Radiology has decided to use the company’s product OpenText™ EMR-Link™ as its comprehensive solution for electronic medical record (EMR) integration and computerized physician order entry (CPOE).

Q3FY20 Financial Highlights: Open Text declared its quarterly result, wherein the Company reported total revenues of USD 814.68 million, as compared to USD 719.15 million in pcp, aided by a stupendous performance from cloud services and subscriptions segment, decent growth from customer support segment, while a lower performance from license segment remained a drag. The company reported a 20.6% y-o-y growth in the Annual Recurring Revenue to USD 662.3 million, representing ~81% of the total revenue, which is commendable. Gross profit stood higher at USD 532.49 million, as compared to USD 479.51 million. The quarter was marked by a surge in the operating expenses, wherein research and development expense stood at USD 108.18 million, up from USD 84.91 million in pcp, sales and marketing was higher at USD 166.23 million compared to USD 132.24 million in Q3FY19 while amortization of acquired customer-based intangible assets and special charges were recorded higher from the previous corresponding quarter. Net income for the period plunged to USD 26.00 million, from USD 72.79 million in pcp, primarily attributed by a surge in other expense, significantly higher interest and other related expense.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: A significant portion of the revenue is being derived from the US, and a weakening USD might hamper the income realization. However, any disruptions in the logistics might lead to a lack of visibility and stability of the performance of the business.

Valuation Methodology: EV to EBITDA Based valuation metrics (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock stood resilient in the recent past and outperformed the benchmark index by 14% YTD. The stock closed above its 200-days simple moving average of CAD 55.65, indicating a long-term bullish pattern. During the quarter, the Company reported addition of premium clients such as Nestlé S.A, United Health Services Hospitals, Continental AG, Astra Daihatsu Motor etc, which ensures long-term business potential and is a key positive for the Company. The Cloud segment is expected to record a ~20% growth rate for FY20, which is encouraging, while the total growth is expected at mid to high single digits. Meanwhile, during the third quarter of FY20, the Group successfully reported a 15.2% y-o-y growth in Operating Cash Flows of CAD 329.6 million, which is impressive looking at the current downturn. Further, ~81% of the group’s revenue is recurring, which provide stability to the cash flow. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a target upside offering single (in percentage terms). For the said purposes, we have considered industry (Technology) forward EV/EBITDA multiple. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 58.14 on June 26, 2020.

OTEX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

BlackBerry Ltd

BlackBerry Ltd (TSX: BB) is a software provider with a stated goal of end-to-end secure communication for enterprises. The firm provides endpoint management and protection to enterprises and embedded software to automotive, medical and industrial OEMs and suppliers.

Q1FY21 Financial Highlights:  BB declared its first quarter results for the period ended FY21, wherein the Company reported revenue of USD 206 million, as compared to USD 247 million in pcp. The decline in the revenue was primarily attributed to decline in software and services and licensing and other income. Gross margin stood lower at USD 143 million against USD 177 million in the previous corresponding quarter. Research and development expense stood lower at USD 57 million against USD 71 million in pcp while selling, marketing and administration reduced to USD 90 million, as compared to USD 121 million in pcp. Inclusion of impairment of goodwill amounting USD 594 million resulted in an operating loss of USD 645 million, as compared to an operating loss of USD 36 million. Net loss widened to USD 636 million, as compared to USD 35 million in pcp. The Group exited the quarter with cash and cash equivalents amounting to USD 312 million while total assets stood at USD 3,215 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: A prolonged measure to contain the spread the virus is likely to affect the Company’s QNX automotive software business. A second wave of the virus is expected to impact the spending from new customers and increase sales cycle times, which would affect the company’s financial performance. 

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of BB appreciated ~17% in the last three months, outperforming the index by ~3%. Over the years, the company has successfully shifted to an integrated information technology company from a mobile phone seller. In order to expand its Geographical presence, BB added more than 12 new channel partners in the past six months including two within Mexico, enhancing the company’s asset monitoring solutions outside of the U.S. and Canada for the first time, which would help the group to service the Clients in a better way. Recently, it has been revealed that the group’s product suite protects the enterprises from 96% of the cyber-attacks, which is likely to drive the business for the group in the near to medium term.  Further, the group introduced AtHoc managed Services which allows any organization to quickly establish and maintain a crisis communications capability. Traditionally this service is used by large organizations; the group’s latest offerings enable the smaller organization to use this feature. Further, easing in lockdown restrictions is likely to help the group’s QNX automotive software business to perform well. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside offering single (in percentage terms). For the said purposes, we have considered peers like Citrix Systems Inc, Absolute Software Inc, Evertz Technologies Inc etc. Hence, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 6.47 on June 26, 2020.

BB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Kinaxis Inc.

Kinaxis Inc. (TSX: KXS) is a Canada-based provider of software solutions for sales and operations planning (S&OP) and supply chain management. The company’s flagship RapidResponse product is offered on the cloud. Its capabilities include consequence evaluation and alerting, responsibility-based collaboration, high-speed analytics, and scenario simulation.

On June 15, the company informed its plan to acquire Rubikloud, a Toronto-based disruptive, an emerging provider of AI solutions that automate supply chain prescriptive analytics and decision-making in the retail and consumer packaged goods (CPG) industries. Kinaxis will acquire Rubikloud for USD 60 million in an all-cash transaction that is expected to close within 60 days

Q1FY20 Financial Highlights: KXS announced its quarterly results, wherein the company reported revenue of CAD 52.75 million, up 15% from CAD 45.75 million in the pcp. The increase in revenue was primarily attributable to solid growth in SaaS revenue coupled with an impressive performance from professional service segment. Gross profit stood higher at CAD 36.91 million against CAD 33.56 million in Q1FY19, thanks to the higher revenue. The quarter was marked by a higher operating expense driven by higher selling and marketing costs and an increase in the general & administrative expenses. Operating profit stood at CAD 8.33 million, lower than CAD 10.19 million in pcp due to a significant increase in operating costs. The company reported a profit of CAD 5.58 million, as compared to CAD 6.96 million in the previous corresponding period.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company reported a de-growth from subscription term license, which remains as a matter of concern for the Company. The entry of a new player within the segment might hinder the product pricing of the Company.

Stock Recommendation: The stock soared ~140% in the last one year, outperforming the index by ~162% and currently trading at the upper band of its 52-weeks trading range of CAD 75.16 and CAD 200.67. The Company provides next-generation services which offer advanced AI-based demand forecasting, promotion, pricing and assortment optimization to the industry. The Company modified its frontline product Rapidvalue, which would help the manufacturers and suppliers with prompt decision making and would accelerate their digital supply chain planning journey to gain hyper agility and visibility and realize value. The software detects and measures the impact of supply chain disruption on key financial performance indicators and fulfilment obligations. During the last three months, the stock soared ~80%, outperforming the index by ~59%. The KXS stock trades significantly premium to the industry median on NTM basis. The stock is trading at a forward EV/Sales multiple of 12.0x, as compared to 4.0x of the industry (Software & IT Services) median. We believe that all the positives are priced in at current trading level. Hence, we have given an ‘Expensive’ rating to the stock at the closing price of CAD 193.41 on June 26, 2020.

KXS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.