Enghouse Systems Limited (TSX: ENGH)  is a Canada-based provider of software and services to a variety of end markets. The firm's operations are organized in two segments namely, the Interactive Management Group and the Asset Management Group. 

Key Highlights:

• Sequential improvement in the liquidity: The group reported an increase in its cash and short-term investments to CAD 231.21 million during Q2 FY22 against CAD 214.81 million in Q1FY22. Further, the operating cash flows also increased to CAD 31.14 million in the reported period (Q2FY22) when compared with the cash flows from operations of CAD 24.34 million in Q1FY22. The strong liquidity helps the company to meet its day-to-day operational expenses along with carrying out the expansionary plans as well.

• Growth strategy: The management has a strong history of focusing on the growth trajectory plan and for that various acquisitions have been a part of the overall growth of the company. The group is still optimistic about future growth through acquisitions and a few of the previous acquisitions are presented below.

Source: Company presentation

• Industry beating profitability margins: In Q2FY22, the company managed its operations and costs efficiently which offset the impact of lower revenues, and resulted in improved profitability margins when compared with the industry median, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group

• Efficient debt management: In Q2FY22, the group efficiently managed its debt with a cautious approach especially during the current scenario of rising interest rates as compared to its peers, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group    

Risks associated with investment

The group is most vulnerable to price wars with the new entrants and the consolidation of big players, which can hamper the margins of the company. Further, the constant change in technology needs an uninterrupted amount of spending on research and development, which is a concern.

Financial overview of Q2FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• During Q2FY22, the group reported the total revenue of CAD 106.31 million, which is lower than the total revenue of CAD 117.33 million in Q2FY21. The decline in the sales was majorly from the lower sales from hosted and maintenance services on account of attrition on current agreements which includes Vidyo offerings.

• The direct cost was CAD 33.58 million during the reported period (Q2FY22) which is almost similar to the direct cost of CAD 33.53 million in pcp. Because of lower revenues and constant direct cost, the group reported net revenue of CAD 72.73 million in Q2FY22 against CAD 83.80 million in pcp.

• During Q2FY22, the net income was down to CAD 17.87 million versus the net income of CAD 20.73 million in Q2FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

Recently the group declared a dividend of CAD 0.185 per common share which is to be paid on August 17, 2022. The company stated an increase in its cash and short-term investments to CAD 231.21 in Q2FY22 against CAD 214.81 million in pcp and the company also reported a surge in the cash flow from operation sequentially, which is a key positive. Further, the management is constantly focusing on the growth avenues by taking lead on the acquisition strategy. Also, the debt weight on the books is light as compared to the industry median which will be of extreme importance in the current scenario of rising interest rates.  On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is currently trading at 2.6x as compared to the industry (technology) mean of 4.2x, suggesting the stock is still undervalued. We have considered Dye & Durham Ltd., Everbridge Inc, etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of ENGH at the last closing price of CAD 26.37  on June 17, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 17, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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