Evertz Technologies Limited (TSX: ET) is an equipment provider for television broadcast telecommunications, and media industries. The company designs, manufactures, and markets video and audio infrastructure equipment for the production, post-production, and transmission of television content.

Key Highlights

• Maintaining Track Record of Rapid Innovation: Early research and development efforts allowed the company to establish itself as the leading supplier to the broadcast business, addressing the continuous technical transition to IP and IT-based production. As a result, it has maintained its track record of rapid innovation, serving as a market leader in the rapidly growing Internet Protocol Television (IPTV) sector and a pioneer in Software Defined Video Network (SDVN) technology.

• Consistent Dividend Distribution:Despite the adverse environment, the company demonstrated financial soundness by maintaining its dividend payout, indicating that ET is an income investor's friend. It recently paid a CAD 0.18 per share quarterly dividend, as well as a special dividend of CAD 1.00 per share on October 05, 2021. Furthermore, the stock offered a dividend yield of 5.51% at its last trading price of CAD 13.07, which seems attractive given the current interest rate environment.

• Rise in Cash from Operations: For Q1FY22 (ended July 31, 2021), cash generated from operations was CAD 38.0 million, compared to CAD 36.3 million for the quarter ended July 31, 2020. The company produced CAD 17.3 million from operations in Q1FY22 v/s CAD 4.1 million in pcp, before taxes and adjustments in non-cash working capital.

• Industry Beating Margins: The management's solid determination and resilience helps the business in leaping the industry margins on many fronts in Q1FY22, which is a key positive. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine

Financial Overview of Q1FY22 (in CAD thousands)

Source: Company

• In Q1FY22, the company reported revenue of CAD 97.2 million, compared to CAD 56.3 million in the previous corresponding period. The revenue increased mainly due to higher projects and a general increase in activity compared to the prior year in all regions.
• The company posted a gross profit of CAD 56.7 million, improving CAD 32.2 million in pcp. The gross margin increased to 58.3% from 57.2% in pcp, mainly due to the lower cost of sales. 
• Earnings before income tax in Q1FY22 stood at CAD 19.8 million against CAD 0.79 million in pcp.

• ET's net earnings elevated by a great extend to CAD 14.7 million from CAD 0.58 million in Q1FY21.

Risks Associated with Investment

Prolonged delays in project execution may lead to a slide in revenue, followed by a lower cash inflow. Further, travel bans and cancellations of sports events, other live events, and various other related projects may also lead to a fall in the company's order book. Any continuation of such a trend could affect ET's financial performance.

Valuation Methodology (Illustrative): EV to EBITDA based valuation

Stock Recommendation 

The company reported exceptional financial results in Q1FY22, with a 72% growth in revenue thanks to substantial success in all key areas. ET caters to the IT industry and provides new software, equipment, and technological solutions. Furthermore, the IT and cloud industries have rapidly grown in recent years and are likely to keep pace due to business changes, shifting consumer tastes, and other factors. Moreover, the business resilience has assisted the company in leapfrogging industry profit margins on numerous fronts in Q1FY22, which is a significant benefit. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 13.07 on November 26, 2021. We have considered CGI Inc, Digi International Inc, Harmonic Inc, etc., as the peer group for comparison.

One-Year Technical Price Chart (as on November 26, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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