Computer Modelling Group Ltd.

Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization.

Key Updates:

• Prudent working capital management: The company reported its current ratio of 2.28x in Q2FY22, higher than the industry median 2.01x. 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 82.2 days, which shows that the group is efficient to convert its investments in inventory and other resources into cash flows.

• 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.

• RSI hovering at an oversold zone: On a daily chart, the 14-days RSI of CMG is hovering near its oversold zone of 38.67, which might lead to a possible price appreciation in the coming trading session. Moreover, the stock is heading near the mid-point of its 20-days Bollinger band, which also suggest a price uptick from the current trading level.

Technical Price Chart (as on December 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Industry beating margin profile: The company commands higher margins than the industry median, which indicates improved operational efficiencies. Notably, during Q2FY22, the group reported its EBITDA margin and operating margin of 40.6% and 34.1%, respectively, versus the industry median of 11.5% and 2%, respectively. Additionally, the company reported its net margin of 26%, as compared to the negative industry median of 1.7%.

Q2FY22 Financial Highlights:

• CMG announced its second quarter result, wherein the company posted its top line at CAD 15.949 million, lower from CAD 17.852 million in the previous corresponding period (pcp). 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 10.509 million v/s CAD 7.991 million in pcp), due to higher research & development costs and an increase in both general & administrative costs and Sales, marketing & professional service.
• Net and total comprehensive income came at CAD 4.146 million, lower from CAD 6.760 million in pcp, partially offset by lower finance costs and income taxes.

Q2 FY22 Income Statement Highlights (Source: Company Report)

Risks: The company reports its major revenue from the Annuity/maintenance licenses fees, which are primarily depends on the oil and gas industry. Hence, due to lower capital expenditure by the oil and gas manufacturers, the company reported a slide in software license revenue across the geographic regions. Continuation of the above trend is likely to dampen the company’s overall operations. 

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

The stock of CMG carries an annualized dividend yield of ~4.751%, which looks attractive considering the ongoing interest rate scenario. During H1FY22, the company has distributed total dividend of CAD 8.031 million, at par with CAD 8.026 million in pcp. The above is impressive as most of the companies are lowering its distribution in order to retain liquidity level. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Pason Systems Inc, Secure Energy Services Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last traded price of CAD 4.21 on December 22, 2021.

*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

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.