Sylogist Ltd

Sylogist Ltd (TSX: SYZ) is a software company that provides Enterprise Resource Planning solutions, including fund accounting, grant management, and payroll to public service organizations. The company operates in one business segment that is the Public Sector.

Key highlights

• Acquired Municipal Accounting Systems, Inc.: Municipal Accounting Systems, Inc., a well-known Oklahoma-based supplier of student information processing and accounting tools to K-12 public school districts, was recently purchased for CAD 37.8 million in cash. MAS has been extremely profitable, and the company plans to increase sales and adjusted EBITDA run rates by about 20% instantly. 

• Diversified customers across sectors and geographies: The public sector is immune to economic downturns, and no client accounts for more than 2% of recurring income. Local governments, non-profit organizations, non-governmental organizations (NGO), education boards and districts, and defense and safety contractors are among the group's public sector clients. The corporation currently has over 1,600 clients globally, ranging in scale and operating sophistication, the vast majority of which are based in the United States and Canada, with the rest in the United Kingdom.

Source: Company 

• Industry beating margins: The company established a strong track record of growth. While growing revenue and enterprise value, the company strives to maintained healthy Gross Margin, EBITDA Margin and Net Margin in Q2 2021, compared to industry median, which is a key positive.

Source: Refinitiv (Thomson Reuters) 

• Healthy dividend distribution: The group continues with a track record of dividend payment. Recently, it paid a quarterly dividend of CAD 0.125 per unit on March 10, 2021. At the last closing price, the stock was offering a dividend yield of 3.514%, which is decent considering the current interest rate dynamics.

Source: Refinitiv (Thomson Reuters)

Financial overview of Q2 2021 (In thousands of Canadian dollars)

Source: Company 

• In Q2 2021, the company’s revenue decreased 6% to CAD 8.8 million, against CAD 9.4 million in the previous corresponding period. The decline in the revenue was primarily due to lower performance from all revenue segments.

Source: Company

• The gross profit in the reported period decreased to CAD 6.2 million, against CAD 7.0 million in the previous corresponding period. Lower revenues and increase in Cost of sales were the prime reasons behind lower gross profit.
• EBIT stood at CAD 1.7 million in Q2 2021, against CAD 3.8 million in pcp. Higher G&A expenses along rise in amortization and share based payments played a role of draggers.
• Net income reported by the company stood at CAD 1.1 million, against CAD 2.8 million in pcp. The fall in net income was mainly due to the reasons discussed above, partially offset by lower income tax expense. 

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 EBITDA 

Note: All forecasted figures and peers have been taken from Thomson Reuter 

Stock recommendation

Sylogist is a leading SaaS provider of mission-critical applications to government agencies, with a strong profitable recurring sales base that is immune to economic downturns. Municipal Accounting Systems, Inc., which offers valuable IP and a large customer base, was recently purchased by the group, bolstering its growth platform in the education space. Furthermore, organic and inorganic growth prospects are enabled by an active M&A pipeline, solid financial position with expanded credit facility ranging from CAD 40 million to CAD 75 million, and industry-leading margins. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a fractional upside (in percentage terms). For the said purposes, we have considered Industry median EV/EBITDA (Software & IT Services). Considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock at the last closing price of CAD 14.23 on May 17, 2021 and would advise investors to wait for a better entry point.

One-Year Price Chart (as on May 17, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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