Evertz Technologies Limited

Evertz Technologies Limited (TSX: ET) is a Canadian company engaged in providing telecommunications equipment and technology solutions to the television broadcast and new-media segment.

Key Updates:

• Economic revival to benefit operations: The company reported improved performance since Q1FY21 and expects the momentum to continue owing to improved vaccination programs across the country. Moreover, the company also believes that the group is highly poised to take advantage of economic revival, which is a key positive. As the industry is transforming towards IP and Cloud-based solutions, we believe ET has the upper hand as it has a leading market share within the telecommunications equipment and technology solutions.

• Better Margins and ratios: Despite the ongoing economic sluggishness, the company retained higher profitability margins than its peers, which indicates improved operational efficiency. Notably, the company reported EBITDA margin and Operating margin at 26.4% and 16.9%, respectively in FY21, higher than the industry median of 14.8% and 8%, respectively. Moreover, the net margin stood higher at 12.2%, as compared to the industry median of 4.6%. The company also retained a lower debt to equity ratio of 0.10x, as compared to the industry median of 0.29x. Improved margins and lower debt to equity ratio indicates higher financial flexibility. The management reported that it would maintain the financial flexibility needed to fund its working capital needs and investment opportunities in the coming future.

• Impressive Dividend Yield: Historically, the company reported a consistent dividend payment, supported by stable cash flow from operations. The stock of ET carries an attractive dividend yield of ~5.467% on an annualized basis, which looks impressive considering the ongoing interest rate scenario.
  

FY21 Financial Highlights:

• ET announces its full year result, wherein the company posted revenue of CAD 342.888 million, declined from CAD 436.592 million a year ago. The decline was primarily due to the lower-income from both United States/Canada and International segments.

   FY21 Segment Revenue (Source: Company Report)

• Gross margin stood at CAD 199.424 million, declined from CAD 248.376 million in pcp. The decrease was primarily attributable to lower income, partially supported by lower cost of goods sold (CAD 143.464 million v/s CAD 188.216 million in pcp).
• Total Expenses stood at CAD 141.438 million, lower from CAD 155.818 million in the previous corresponding period (pcp). The quarter was marked by lower general expense, decline in research and development costs combined with a foreign exchange loss.
• Net earnings stood lower at CAD 41.960 million, as compared to CAD 69.172 million in pcp. The decline was primarily due to lower gross margin, partially offset by lower expenses and lower income tax.

FY21 Income Statement Highlights (Source: Company Report)

Risks: Postponement or cancellation of sporting events or other live events due to the restrictions imposed on account of the pandemic, would have an adverse effect on the overall performance of the company due to lower orders from its clientele. 

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The company manufactures and sells video and audio infrastructure solutions for the production, post-production and transmission of television content, and its services come under the essential segment, which is a key positive and indicates continuity in operation. We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the industry (Technology) median on the next twelve months basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ET at the last closing market price of CAD 13.17 on August 27, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 27, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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