Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The company operates through two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Updates:

• Growing traction from the Professional services segment: In Q1FY22, the company’s Professional services reported its income of CAD 17.9 million, which is higher than CAD 15.8 million in pcp. This was supported by improved traction from several large professional services projects, particularly for transportation and public safety customers. Notably, in Q1FY22, the company derived ~16% of the total group’s revenue from Professional services.

• Increase in Cash and cash equivalents: The company reported a higher cash balance CAD 210.8 million in Q1FY22, as compared to CAD 195.8 million in Q4FY21. This is likely to report higher liquidity, which is a key positive. Moreover, the company reported a higher cash from operations of CAD 24.3 million in Q1FY22, higher than CAD 20.5 million in pcp.

• Robust Profitability margins: In Q1FY22, the company reported its EBITDA margin and operating margin of 34.7% and 23.4%, respectively, as compared to the industry median of 3% and negative industry median of 3.8%, respectively. This indicates improved cost-structure and is a key positive for the company. Moreover, the company’s net margin stood higher at 19.4% in Q1FY22, as compared to the negative industry median of 6.3%.

Risks associated with the Investment:  

In order to remain afloat within the industry, the products require constant innovations and upgradation. Moreover, the arrival of a new player with a better offering might lead to price competition and loss of market share.

Q1FY22 Financial Highlights:

• ENGH declared its quarterly result, wherein the company reported revenue of CAD 111.1 million, as compared to CAD 119.1 million in Q1FY21. The slide was primarily due to a lower income from Software licenses and hosted & maintenance services segments, partially offset by improved performance from the Professional services segment.

• Result from operating activities was recorded at CAD 35.7 million, slide from CAD 40.6 million in pcp. The decline was primarily due to lower revenue coupled with higher direct costs, partially offset by lower operating expenses.

• Income before income taxes stood at CAD 26.6 million, slightly higher than CAD 26.1 million in pcp, primarily due to lower foreign exchange losses and lower amortization expenses.

• Net Income for the period stood at CAD 21.5 million, as compared to CAD 20.6 million in pcp, due to the above-mentioned facts and lower provision for income taxes.

 Valuation Methodology Illustrative: Price to Earnings based

Analysis By Kaline Group

Stock Recommendation:

Despite a sluggish economic growth, the company reported the quarter on a positive note, and reported a higher cash flow from operations, which is a key positive. During the quarter, the company made progress on several large professional services projects, particularly for transportation and public safety customers. Meanwhile, ENGH continue to experience cost savings as it consolidates research and development efforts into lower-cost jurisdictions, reduce premise costs as well as achieve cost savings through integrating acquisitions.

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 Voyager Digital Ltd, Dye & Durham Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of ENGH at the last closing price of CAD 33.68 on June 01, 2022. 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 on June 01, 2022). Analysis by Kalkine Group

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

 Technical Analysis Summary

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