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

• Growing traction from Energy transition-related modelling segment: On account of the change in the emission norms and ongoing transition-related activities, the group is witnessing higher traction for its new software and consulting contracts from the above segment, which is a key positive. Notably, the company has the technical capabilities to support energy transition-related modelling and is highly poised to take opportunities coming from the above segment.

• Prudent working capital management: The company reported its current ratio of 2.28x in Q2FY22, higher than the industry median 2.0x. The above indicates that the company has ample current assets to meet its short-term liabilities. Moreover, the company has lower cash cycle days of 65.3 days, lower than the industry median of 84.6 days, which shows that the group is efficient to convert its investments in inventory and other resources into cash flows.

• Consistently generating free cash flows: The resilience of the business helped the group in generating consistent free cash flows, which is applaudable. In Q2 2022, the company’s free cash flow stood at CAD 4.49 million against CAD 4.47 million in the previous sequential quarter.

• Industry beating margins: Despite the hard time for the industry and economy, the management’s solid determination helped them leaping the industry median margins on many fronts in Q2 2022, which is a key positive. The chart below gives a glimpse of this.
  

Source: REFINITIV, Analysis by Kalkine Group 

Risks associated with investment

Annuity/maintenance license payments are mostly dependent on the oil and gas sector, which 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. If the current trend continues, the financials might fall.

Financial overview of Q2 2022

Source: Company Filing

• CMG announced its second quarter result, wherein it posted its top line at CAD 15.9 million, lower from CAD 17.8 million in the previous corresponding period. The decline was primarily due to a decline in both software license revenue and Professional services.
• The company witnessed a surge in its operating expenses (CAD 10.5 million v/s CAD 7.9 million in pcp), due to higher research & development costs and an increase in both general & administrative costs and Sales, marketing & professional service. As a result, its operating profit fell to CAD 5.4 million in the reported period against CAD 9.3 million in pcp.
• Net and total comprehensive income came at CAD 4.1 million, lower from CAD 6.7 million in pcp, partially offset by lower finance costs and income taxes.
  

Valuation Methodology (Illustrative): Price to Earnings

Analysis by Kalkine Group 

Stock Recommendation:

Although the company's performance is being hampered by the ongoing COVID-19 outbreak, we are seeing a resurgence in oil and gas demand as well as commodity prices. Furthermore, growing global commodity prices are likely to boost demand for the company's products from the oil and gas industry in the future, which is a significant benefit. As market sentiment improves, the company is also focused on returning to growth by engaging with its customers over their forthcoming yearly budget cycles to supply them with essential solutions.

The company maintained a strong financial position and closed the quarter with CAD 48.0 million of cash, no debt and no significant accounts receivable collectability concerns, which is a key positive. Furthermore, the company also improved its free cash flows on a sequential basis. Meanwhile, the stock is carrying an annualized dividend yield of ~4.5%, which looks attractive considering the ongoing interest rate scenario. Considering the aforesaid facts, we recommend a “Speculative Buy” rating on the stock at the last traded price of CAD 4.40 on January 11, 2022.

*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 January 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.