Computer Modelling Group Ltd

Computer Modelling Group Ltd. (TSX: CMG) is a Canada-based computer software technology company serving the oil and gas industry. The Company operates through the development and licensing of reservoir simulation software segment.

Key highlights

• Healthy operating profit: The Company continues to be profitable and have solid cash generation despite the ongoing economic challenges in the oil and gas industry. During fiscal 2021, operating profit rose and represented 45% of total revenue V/s 42% in the previous corresponding period.
  

• Industry beating margins: Despite the hard time for the industry and the economy, the management’s solid determination helped them leaping the industry median margins on many fronts in FY2021, which is a key positive. The chart below gives a glimpse of this.

• An income play: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. Recently, the company paid a quarterly dividend of CAD 0.05 per share, on June 15, 2021. Furthermore, at the last closing price, the stock was offering a yield of 4.7%, which is encouraging amid the lower interest rates.

Dividend History, Source: REFINITIV

Financial overview of FY 2021

Source: Company

• The company announced its annual result, wherein it reported its top line at CAD 67.3 million, lower from CAD 75.7 million in the previous corresponding period (pcp). The decline was primarily due to a 13.3% y-o-y decline in the Software license revenue to CAD 59.5 million.
• The company witnessed solid operational efficiency and reported a 16.4% slide in operating expenses over the previous corresponding period, supported by the reduced SM&P services, R&D expenses, and general expenses. Operating profit stood at CAD 30.5 million v/s CAD 31.7 million in pcp.
• Net and total comprehensive income stood at CAD 20.1 million v/s CAD 23.4 million in pcp, supported by lower operating expenses.

Risks associated with investment

Annuity/maintenance license payments, which are mostly dependent on the oil and gas sector, are the company's primary source of revenue. The firm suffered a drop in income from the aforementioned sector owing to decreased capital allocation from the oil and gas industry firms for a significant portion of 2020 owing to the degradation of worldwide crude oil prices. If the current trend continues, the financials might fall.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

Despite the chaos caused by the COVID-19 epidemic, the firm produced a good set of figures, outperforming the industry margin on many fronts, which is noteworthy. Furthermore, it maintained its free cash flow generation pace, with CAD 24.47 million during FY21. By altering its cost structure, the corporation also hopes to ensure the business's long-term viability. It has taken various cost reduction measures and is preserving its liquidity and maintaining a strong balance sheet to deal with this uncertain time. Furthermore, rising worldwide commodity prices are expected to promote future demand for the company's products from the oil and gas industry, which is a major plus. Meanwhile, CMG's stock offers a dividend yield of 4.7%, which is decent given the current interest rate environment. Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 4.22 on August 04, 2021. We have considered Mind Technology Inc, Solaris Oilfield Infrastructure Inc, 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 August 04, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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