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:

• Collaboration with Switchio: Recently, the company reported its collaboration with electronic payment firm Switchio, wherein the group would offer automated transit fare collection into the North American market. Collaboration with Switchio is expected to boost the company’s presence within the Smart Cities segment, especially EMV card acceptance in public transit and parking. The company also offers modular solutions that enable quick and effortless EMV bank card payments.

• 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 4%, 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 5.7%.

• Increase in Dividend payment: The company reported a higher dividend payment of CAD 8.8 million in Q1FY22, as compared to CAD 7.4 million in pcp. This is impressive as most of the companies are lowering their dividend payment in order to retain liquidity.
  

• Improved 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.

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:

Q1FY22 Income Statement Highlights (Source: Company Report)

• ENGH declared its Q1 FY22 results, 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 in Q1 FY22, 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: 

At the end of Q1FY22, the company reported a higher cash and cash equivalents of CAD 210.8 million, as compared to CAD 195.8 million in Q4FY21. This is expected to increase the overall liquidity of the company. 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 ‘Buy’ rating on the stock of ENGH at the last closing price of CAD 35.13 on April 27, 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 April 27, 2021). Analysis by Kalkine Group 

  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.