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

• Expanding territories through acquisition: The company acquired “Altitude”, which provides omni-channel contact centre solutions for small and large organizations, focusing on the business process outsourcing market segment. The acquisition of Altitude extends the presence to Portugal, expands its research and development footprint and further solidifies the operations in Spain, Brazil and Mexico enabling them to leverage additional sales opportunities within these markets.

• Improving operating matrix: Despite the turmoiled period in 2021, the Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.

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 Q4FY21, the company reported its long-term debt of CAD 17.7 million, which is the lowest in the last five quarters. Also, its debt-to-equity ratio stood at 0.06x in Q4 2021, lower than the industry median of 0.16x.

Source: REFINITIV, Analysis by Kalkine Group

• Industry beating margins: The management’s solid determination helped them leap the industry median margins on many fronts in Q4 2021, which is a key positive. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group 

 Financial overview of FY 2021

Source: Company Filing

• In FY 2021, the company posted revenue of CAD 467.1 million, compared to revenue of CAD 503.7 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 stood at CAD 155.2 million, against CAD 162.0 million in FY2020, partially supported by lower operating expenses (CAD 182.3 million V/s CAD 196.5 million).
• Income before income taxes was reported at CAD 107.4 million, significantly lower than CAD 121.7 million in pcp. The year marked higher foreign exchange losses and higher other expense.
• Net Income for the period stood at CAD 92.7 million compared to CAD 98.5 million in FY2020.
  

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. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

Fiscal 2021 was another year of positive income and operating cash flows. The group has reported improving operating matrix on the sequential basis as well as it kept minimizing its long-term debt and reported long term debt of CAD 17.7 million, which is at the lowest rank compared to last five quarters. Moreover, an acquisition of Portugal based BPO company Altitude Software is likely to deliver improved business prospects in the coming quarters through its modular software suite, which supports all media channels through its strong inbound and outbound capabilities for both on-premises and hosted contact centre activities. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 46.46 on December 21, 2021. We have considered Lightspeed Commerce Inc, Kinaxis Inc, Open Text Corp, etc. as the peer group for the comparison.

*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 December 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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