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 Updates:

• Strong YTD performance: For the first half of FY22, the company reported a 30% y-o-y jump in its top-line supported by a general increase in operational activities across both North America and International geographies. Notably, revenue from North America was up by 39% on y-o-y basis to CAD 142.646 million in H1FY22. The management expects the above momentum to continue in the coming quarters, supported by the current industry transition towards IP and Cloud-based solutions, which is expected to enhance the company’s order book.

• Improved profitability margins: In Q2FY22, the company reported its EBITDA margin and operating margin of 24.3% and 22.1%, respectively, as compared to the industry median of 16.7% and 10.3%, respectively. Moreover, net margin stood at 26.6%, as compared to the industry median of 18.2%. The above indicates improved operational efficiencies, which is a key positive.

• Healthy D/E ratio: The company reported a lower debt to equity ratio of 0.14x in Q3FY21, as compared to the industry median of 0.25x. A lower debt to equity ratio indicates improved financial flexibility and prudent capital management, which is a key positive.

Q2FY22 Financial Highlights:

• ET announced its quarterly result, wherein the company posted its revenue of CAD 107.199 million, increased from CAD 100.482 million in pcp. The growth was primarily driven by higher income from North America, partially offset by lower income from the international segment.
• The company reported its gross margin of CAD 61.077 million, improved slightly from CAD 59.659 million in pcp, supported by elevated top-line, partially offset by higher cost of goods sold (CAD 46.122 million v/s CAD 40.823 million in pcp).
• The quarter was marked by higher selling, administrative and general costs, coupled with an increase in research & development expenses. Earnings before income taxes stood at CAD 23.421 million, as compared to CAD 28.118 million in pcp.
• Net earnings for the period stood at CAD 17.184 million, as compared to CAD 21.188 million in pcp.

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks: The company reported an increase in its input costs like selling, administrative & general costs and research & development expenses, which has resulted in subdued profitability. Continuation of the above trend is likely to dampen the company’s upcoming performance. 

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendations:

The company paid a significantly higher dividend of CAD 103.747 million, as compared to CAD 13.759 million in pcp. The above is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. The stock of ET carries a dividend yield of ~5.612% on an annualized basis, which looks attractive considering the persisting interest rate scenario. 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 Spirent Communications plc, Harmonic Inc and Evs Broadcast Equipment SA. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of ET at the current market price of CAD 12.45 at 9:45 AM Toronto time on December 20, 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

One-Year Technical Price Chart (as on December 20, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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