One Mid Cap Technology Stock under the Radar - ENGH

Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The group's operations are organized into two segments, namely the Interactive Management Group and the Asset Management Group.

Key highlights

• Increase in cash from operating activities: The company's cash flows from operational activities grew to CAD 24.3 million in Q1 2022, up from CAD 20.5 million in the previous corresponding period. The rise in cash from operations was primarily attributable to a CAD 6.6 million reduction in income taxes paid as a result of comparatively larger payments during the prior year's similar quarter, somewhat offset by lower operational cash flow before working capital adjustments.
  

• Industry beating margins: In Q1 2022, the management's persistence allowed them outperform the industry median margins on a number of fronts. Its operating and net margins were much higher than the negative industry median margins, which is a crucial positive. This is seen in the graph below.
  

Source: REFINITIV, Analysis by Kalkine Group 

• Minimizing debt on sequential basis: On the back of robust business and healthy cash flows the company is able to decrease its debt burden on the sequential basis, which is a key positive. Reduction in debt enhances the financial flexibility of the firm. Notably, at the end of Q1 2022, the company reported its long-term debt of CAD 15.9 million, which is the lowest in the last five quarters. Also, its debt-to-equity ratio stood at 0.05x in Q1 2022, lower than the industry median of 0.16x.

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with investment

The company offers several IT-related services, and the products require constant innovation to remain competitive within the industry. Thus, the arrival of any new players with attractive proposition would lead to price competition, which might hinder the company’s margin and client-base.

Financial overview of Q1 2022 (Expressed in 000’s of CAD)

Source: Company Filing

• In Q1 2022, the company posted revenue of CAD 111.1 million, compared to revenue of CAD 119.1 million in the previous corresponding period, the lower revenue was mainly due to decreased hosted and maintenance revenue as well as lower software revenue.

• The result from operating activities in Q1 2022, stood at CAD 35.7 million, against CAD 40.6 million in Q1 2021, partially supported by lower operating expenses (CAD 42.5 million V/s CAD 46.5 million).

• Income before income taxes was reported at CAD 26.6 million, slightly higher than CAD 26.1 million in pcp. Supported by lower foreign exchange losses and higher other income.

• Net Income for the period stood at CAD 21.5 million compared to CAD 20.6 million in Q1 2022.

 Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Analysis by Kalkine Group

Stock recommendation

In the first quarter of 2022, revenue was CAD 111.1 million, down from CAD 119.1 million in the pcp. While revenue had mainly reverted to pre-COVID levels in the comparison period, it was the tail-end of a period that had been boosted by an infusion of COVID-related demand for its remote-work and visual computing solutions. However, it generated more cash from operational activities during the same time, and it continued to reduce its long-term debt, reporting long-term debt of CAD 15.9 million, the lowest in the past five quarters, which is a big positive.

The company sees a rising demand for cloud-based recurring revenue solutions, and as with all of its revenue streams, it is carefully ensuring that this is accomplished without jeopardizing profitability, especially as it predicts future inflationary cost rises. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the last closing price of CAD 39.71 on March 25, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 25, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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