Constellation Software Inc.

Constellation Software Inc. (TSX: CSU) is a Canada-based company that develops and customizes software for the public- and private-sector markets. The Group acquires, manages, and builds vertical-specific businesses. Its operations are organized into two segments: Public Sector and Private Sector. The portfolio companies serve various markets including, communications, credit unions, beverage distribution, tour operators, auto clubs, textiles and apparel, hospitality, and community care.

The Board of Directors declared a quarterly dividend of US$ 1.00 per share, payable on July 10, 2020.

Q1FY20 Financial Highlights: CSU declared its quarterly results, wherein the Company reported a stupendous growth of 16% on y-o-y basis at US$ 953 million, primarily driven by improved numbers from professional services, and maintenance & other recurring segments. The Company witnessed a higher staff expense and an increase in amortization of intangible assets. Net income of the Company stood lower at US$ 83 million, as compared to US$ 87 million in the previous corresponding period, due to higher finance costs, a bargain purchase gain of US$ 28 million included in Q1FY19 coupled with higher income tax expense. The Company exited the quarter with a cash balance of US$ 364 million and total assets of US$ 3,577 million. Free cash flow stood at US$ 311 million, reflecting an increase of 24% on y-o-y basis. The quarter was marked by several acquisitions amounted to US$ 107 million, excluding the deferred payment of US$ 48 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of CSU stood buoyant and delivered a decent ~15% and ~27% return in the last six months and one year, respectively. The performance of the Company remains unaffected in the current challenging scenario, and the Group was able to generate improved revenues during the period, which is commendable. We expect the Company to be benefitted from its acquisition. While on a long-term basis, the business model is resilient and is backed up by healthy fundamentals, strong liquidity and low D/E ratio, the Group might face short-term glitches from the cancellation of the ongoing software maintenance contracts by certain customers and from the suspension new software purchases.  The stock is available at P/E multiple of 53.90x on a TTM basis, significantly higher than the industry median. We believe, the premium valuation is justified owing to the market share, business-model and double-digit return ratio of the Company. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of CAD 1,471.98 per share as on May 11, 2020.

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

Tucows Inc

Tucows Inc (TSX: TC) is a software & computer services company engaged in the business of providing internet services. The company’s business is divided into two business segments, i.e. Domain Services and Network Access Services. The services such as portfolio services, value-added services and domain name registration services are catered by Domain Services segment. The services such as high-speed mobile and fixed Internet access, network consulting services and Internet hosting is done through Network Access Services segment.

Financial Highlights – Decent Q1 Financial Year 2020 (31^st March 2020, USD, Thousand)

(Source: Quarterly Report, Company Website)

In the first quarter of the financial year 2020, driven by an increase in the revenue from all businesses for the period, the net revenue surged by 6 per cent to USD 83,985 thousand as against USD 78,953 thousand in Q1 FY2019. The gross profit surged by 11 per cent from USD 22,651 thousand in Q1 of the financial year 2019 to USD 25,150 thousand in Q1 FY2020. The group’s adjusted EBITDA increased significantly by 34 per cent to USD 12,681 thousand in the first quarter of the financial year 2020 from USD 9,431 thousand in Q1 FY2019. The net income stood at USD 2,834 thousand in Q1 FY2020 versus USD 2,799 thousand in Q1 FY2019, reflecting an increase of 1 per cent for the period. The group’s basic net earnings per share surged by 4 per cent to 0.27 cents in Q1 FY2020 from 0.26 cents in Q1 of the financial year 2019. The net cash from operating activities stood at USD 14,073 thousand in Q1 FY2020 versus USD 8,991 thousand in Q1 FY2019, reflecting an increase of 57 per cent for the period.

Share Price Performance

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

Conclusion

The company has shown an increase in financial performance in the first quarter of the financial year 2020. Both the top-line and the bottom-line performance have improved, with a strong operational performance for the period. The company continues to implement the strategy and business model to deliver returns. There remained a significant pipeline of business opportunity for the company. The group’s Domains business is focussed on reseller customers, who contributed in gross margin of over 20 per cent versus Q1 FY2019 data in the Wholesale channel. The company, through improved economics of its carrier relationships, experienced growth in Ting mobile business. TC’s Ting internet continues to expand in the new towns and adding new customers for the period, which approximately doubled the gross profit in Q1 FY2020 versus Q1 FY2019. The group acquired Cedar Holdings on 1^st January 2020, which will help to increase market share.

Based on the decent growth prospects, we have given a “Buy” recommendation at the current price of CAD 78.13 (as on 11th 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.