Absolute Software Corporation

Absolute Software Corporation (TSX: ABT) serves as the industry benchmark for Endpoint Resilience, visibility and control. Embedded in over a half-billion devices, the Company enables more than 12,000 customers with Self-Healing Endpoint^® security, always-connected visibility into their devices, data, users, and applications. The Company provide services to several corporates and offers cloud-based solutions and IT & security administrators services.

The Group declared a quarterly cash dividend of CAD 0.08 per share on, payable on May 29, 2020.

Q3FY20 Financial Highlights: For the quarter ended March 31, 2020, Absolute Software reported a revenue of US$ 26.06 million, reflecting a 5% y-o-y growth over Q3FY19. The increase was driven by a 7% y-o-y growth in Annual Contract Value Base. The Business witnessed a 13% annual growth from Enterprise & Government bodies while the demand from Education sector witnessed a 7% decline over Q3FY20.  Operating income stood lower at US$ 3.18 million, as compared to US$ 3.53 million in pcp. The decline was primarily attributable to higher sales and marketing expenses, higher research & development costs and an increase in general and administration expenses. Net income declined to US$ 2.26 million from US$ 2.51 million in the previous corresponding quarter due to lower operating income.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Guidance: For FY20, the Company reiterated its guidance and expects revenue within the range of US$ 103 million to US$ 106 million, which translates into a 4% to 7% annual growth. The group has revised its Adjusted EBITDA guidance upward and expects it to be 21% to 25% of total revenue. It expects cash from operating activities to be in the range of 16% and 22% of revenue. The group mentioned that it is reducing its capex guidance and is likely to invest in the range of US$ 3.0 million and US$ 4.0 million.

Valuation Methodology (Illustrative):  Price/ CF based Relative Valuation

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

Stock Recommendation: The stock of ABT stood resilient in the recent past and reported a stupendous growth 61% in the last nine months. The Group provides Cloud-based services and derives more than ~70% of the ACVs from Enterprise & Government sector, which indicates a stable business flow. The Business made a remarkable performance by maintaining its net ACV Retention to 100%, denotes robust product-satisfaction, which is commendable. The group has reiterated its FY 20 guidance and expects Adjusted EBITDA to increase from the previous guidance. At the current market price, the stock is offering a dividend yield of 2.703%, which is attractive looking at the current interest rate situation. We have valued the stock using Price/CF-based relative valuation approach and taken Industry (Software & IT Services) median on NTM basis and arrived at a target price offering a double-digit upside potential (in % terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 11.84 as on May 12, 2020.

ABT One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

CGI Inc.

CGI Inc. (TSX: GIB.A) is an independent IT and business consulting firm which delivers an end-to-end portfolio of capabilities. The group offers strategic IT and business consulting, business process services and intellectual property solutions.

To mitigate the COVID19 pandemic, CGI took prompt actions and seeking various cost reduction measures to protect its financial stability. However, the group has a strong balance sheet and enhanced its liquidity position through a credit facility amounting to CAD 1,764.7 million.

Q2FY20 Financial Highlights: For the quarter ended March 31, 2020, GIB.A reported a stable set of numbers and posted a 2% y-o-y increase in revenues of CAD 3,131.14 million. The increase was attributed by a positive impact from recent business acquisitions, while lower work volumes from infrastructure services remained a drag. Adjusted EBIT increased to CAD 483.2 million from CAD 454.1 million in Q2FY19 while adjusted EBIT margin improved 60 bps to 15.4%. The Company reported its net earnings at CAD 314.8 million, reflecting a slight fall from CAD 318.3 in Q2FY19. During the quarter, the Company’s total operating expenses stood higher, primarily due to higher costs of services, selling and administrative, a considerable jump in acquisition-related and integration costs followed by a jump in net finance costs, partially supported by a lower foreign exchange loss.

Q2FY20 Income Statement Highlight (Source: Company Reports) 

Valuation Methodology (Illustrative):  P/CF based Relative Valuation

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

Stock Recommendation: The Company derives a major chunk of its income (~12.8%) from an esteemed clientele i.e. U.S federal government, and we believe it will act as a safeguard, ensuring stable future cash flows for the business. The Company operates through a diversified business model and generates its revenue from all the major geographies, which indicates a lower risk-factor from the business point of view. The Group is focusing on implementing several cost efficiency measures and has ample liquidity to weather the current crisis. CGI Inc. has robust product-line offering services like information technology (IT), business process services (BPS), systems integration and consulting and has a resilient business model. The demand of these services is expected to grow as the current situation stabilizes. The stock made a strong recovery from the recent low, and we believe the current level offers a good entry point. Notably, the stock is trading above its 20-days and 50-days simple moving average (SMA) of CAD 86.87 and CAD 82.98, respectively, which indicates a bullish pattern. We have valued the stock using Price to Cash-flow based relative valuation approach and taken peers like F5 Networks Inc (NYSE: FFIV), Fortinet Inc (NYSE: FTNT) , Open Text Corp (TSX: OTEX) etc. and arrived at a target price offering a lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 87.53 as on May 12, 2020.

GIB.A One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Sierra Wireless Inc.

Sierra Wireless Inc. (TSX: SW) is a leading IoT solutions provider that combines devices, network and software to unlock value in the connected economy. The group operates via two segments viz IoT Solutions and Embedded Broadband.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, SW reported a slide in top-line at US$ 157.57 million, as compared to US$ 173.81 million in the previous corresponding period. The reduction in income was primarily due to a soft performance from IoT Solutions, resulting in a 16.4% decline while revenue from Embedded Broadband segment remained flat. Within the IoT Solutions segment, the Group witnessed robust recurring and other service revenue while decline in the hardware sales in Enterprise gateway products and IoT Solutions modules remained a drag. Gross margin took a hit and stood at US$ 43.58 million, significantly lower than US$ 54.63 million in pcp. Loss from operations widened to US$ 21.48 million, from US$ 9.80 million in Q1FY19. The decline was majorly attributable to increased sales and marketing expense and a higher amortization expense, partially supported by a lower research and development expense, lower administration, and a fall in restructuring costs. Net loss stood considerably higher at US$22.66 million, as compared to US$11.22 million in the previous corresponding quarter, due to a surge in foreign exchange loss, while an income-tax recovery supported the bottom-line.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  EV/Sales based Relative Valuation

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

Stock Recommendation: The stock of SW has fallen ~33% so far this year due to the ongoing pandemic resulting in a selling pressure across the broader market. Due to the ongoing COVID 19 pandemic, SW faced some logistics challenges across its manufacturing component suppliers in China. However, the overall impact was considerably less, and the Chinese units are resuming manufacturing process. Sierra’s key performance metrics look strong with stable performance from recurring revenue followed by new design win. We believe the demand within the Automotive segment to remain soft for a while and would recover as the situation normalizes. The stock witnessed a short-term pull-back in the stock and generated a ~26% return in the last one month, outperforming the index by ~19%. The stock has entered into a short-term bullish trend and closed above its 20-days and 50-days simple moving average (SMA) of CAD 11.78 and CAD 10.04, respectively. We have valued the stock using EV/Sales based relative valuation approach and taken peers like Digi International Inc, NETGEAR Inc, Telit Communications PLC etc. and arrived at a target price offering a lower double-digit upside potential (in % terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 11.78 as on May 12, 2020.

SW One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Evertz Technologies Limited

Growing Demand from International Segment to Drive business Prospects: Evertz Technologies Limited (TSX:ET) provides software, equipment, and technology assistance and produces, markets video & audio infrastructure solutions for the television, telecommunications, and media segments. 

To mitigate the current COVID 19 crisis, the group took some prudent steps to maintain the continuity of the business. The group is working closely with customers and providing support from online tools and in-house equipment. ET also Securing extra parts and alternate local suppliers to ensure a smooth supply chain.

Q3FY20 Financial Highlights: ET declared its quarterly results, wherein the Company reported total revenue of CAD 121.23 million, as compared to the CAD 120.94 million in Q3FY19. The marginal improvement was due to decent growth from International segment, partially offset by a lower revenue from United States. The Company reported its gross margin at 56%, in line with the previous corresponding period. Operating income stood at CAD 26.21 million, came lower than CAD 28.17 million in the previous corresponding quarter, on account of higher selling & administrative expense, increased general expense, rise in research and development costs, which was partly offset by a gain on foreign exchange. The Company reported a lower net income of CAD 19.40 million, as compared to CAD 21.93 million in the previous corresponding period, majorly due to a lower operating income, which was partly offset by lower income tax. At the end of the quarter, the group has CAD 51.6 million of Cas and total assets stood at CAD 437.34 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  Price/Earnings based Relative Valuation

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

Stock Recommendation: The Company provides services like software, equipment, and technology assistance and derived majority of the revenue from the North American market. The Company is expanding its presence across the international Geographies, which would eventually create a diversified revenue base. The stock bounced back from the recent lows and generated a ~6% return during the last one month. The stock is trading above its 20-days and 50-days simple moving average of CAD 14.64 and 13.93, respectively, suggests a short-term bullish trend. The stock offers a healthy dividend yield of 4.77%, which seems attractive, looking at the current interest rate scenario. The COVID-19 outbreak has posed challenges for almost all businesses around the world, and investors are leaning towards safe Businesses which ensures stable cash flows and uninterrupted liquidity. The business model fits both the above criteria and has a low D/E ratio (0.11). We have valued the stock using Price/Earnings based relative valuation approach and taken Industry (Communication & Networking) median on NTM basis and arrived at a target price offering a lower-double digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 15.07 as on May 12, 2020.

ET One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Lightspeed POS Inc

Lightspeed POS Inc (TSX: LSPD) is a software & computer services company based out of Canada. It offers sales platform solutions to its clients. The Group’s software solutions help users in the management of entire business from inventory, sales, customer preferences and analytics.

Financial Highlights – Strong Revenue Growth for Q3 and 9M FY2020 (31^st December 2019) Period

(Source: Quarterly Report, Company Website) 

For the nine months period for FY2020, driven by increase in revenue from software and payment, the revenue surged to USD 84,366 thousand as against USD 56,166 thousand for 9M FY2019. In Q3 FY2020, the revenue stood at USD 32,275 thousand versus USD 20,097 thousand in Q3 FY2019. Due to an increase in the operating expenses for the period, the group reported an operating loss for USD 37,925 thousand for 9M FY2020 versus an operating loss of USD 14,421 thousand for 9M FY2019. The operating loss for Q3 FY2020 stood at USD 16,448 thousand versus an operating loss of USD 5,732 thousand in Q3 FY2019. The Group’s Net loss (including comprehensive loss) for nine months in FY2020 stood at USD 34,934 thousand versus a Net loss of USD 87,449 thousand for 9M FY2019. The net loss stood at USD 15,762 thousand in Q3 FY 2020 versus a net loss of USD 71,128 thousand in the third quarter of the financial year 2019. The basic and diluted loss per share stood at 0.41 cents for 9M FY2020 versus a basic and diluted loss per share of 2.94 cents for 9M FY2019.  The basic and diluted loss per share stood at 0.18 cents in Q3 FY2020 versus a basic and diluted loss per share of 2.37 cents in Q3 FY2019. 

Share Price Performance

Daily Chart (Source: Refinitiv, Thomson Reuters)

Lightspeed POS Inc shares closed at CAD 25.92 at the time of writing after the market close on 12^th May 2020. Stock's 52 weeks High is CAD 49.70 and Low is CAD 10.50.

Conclusion

The Company continues to implement the strategy and business model to deliver returns. There remains a significant pipeline of business opportunities to tap in the near term for the group. LSPD has shown a decline in the financial performance for the third quarter and nine months of the financial year 2020. The top-line performance has improved, with bleak operational performance and the bottom-line performance declined. The Group’s recurring revenue from software and payments surged significantly by 58 per cent. As more and more businesses started moving to cloud-based alternatives, the company’s platform is expected to increase profitability and outperform its competitors. The merchant base of Lightspeed is expanding rapidly and is progressing well to become global leader in serving hospitality merchants and complex SMBs. To expand its operations, the group is looking for acquisitions and organic growth.  In Q4 FY2020, Lightspeed expects its revenue to be in between USD 35 million to USD 35.7 million, which represent a growth of 64 per cent to 68 per cent on year-over-year basis.

Based on the above rationale, we have given a "Hold" recommendation at the closing price of CAD 25.92 (as on 12^th May 2020).

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.