Enghouse Systems Limited

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

Key Updates:

• Win of New Contract from the Norwegian government: On April 28, 2021, the company secured a CAD 29 million contracts from the Norwegian government, wherein the company would provide state- of-the-art technology solutions for regional Emergency Control Rooms. The company would provide services like call handling, dispatch and coordination of fire vehicles and other first response resources like police and ambulance. The tenure of the above contract is for eight years. 

• Higher Dividend Payment amidst Turbulent times: In Q1FY21, the company distributed higher dividend to its shareholders despite a slowdown in the economy. The above suggests a stable cash flow generation and indicates operational resiliency. Moreover, the company has a consistent track record of dividend payment over the last five years, which is a key positive. Notably, the company announced a total dividend of CAD 7.472 million in Q1FY21, higher than CAD 6.021 million in pcp.

Five Years Dividend History : Refinitiv (Thomson Reuters)

• Industry Beating Margin profile: The company reported better margins than the industry median. During the first quarter of FY21, EBITDA margin and operating margin stood at 46.40% and 25.10%, respectively, significantly higher than the industry median of 8.00% and 0.50%, respectively. Meanwhile, the company reported its net margin at 17.30% as compared to the net margin of -4.3% of the industry median. 

Source: Refinitiv (Thomson Reuters)

Q1FY21 Financial Highlights:

• ENGH announced its quarterly result, wherein the group posted revenue of CAD 119.100 million, reflecting a growth of ~7.6% on y-o-y basis. The increase was driven by strong momentum in hosted and maintenance revenue coupled with an increased income from Professional services.

Source: Company Report

• Result from operating activities stood at CAD 40.699 million, surged 32% over the previous corresponding period (pcp). The increase was supported by increased revenue, partially offset by slightly higher operating expenses (CAD 46.510 million v/s CAD 45.760 million in Q1FY20).
• Income before income taxes stood at CAD 26.161 million, significantly higher than CAD 20.767 million in pcp. The quarter was marked by higher foreign exchange losses (CAD 3.110 million v/s a gain of CAD 0.347 million in pcp and higher amortization of acquired software and customer relationships costs (CAD 10.774 million v/s CAD 10.080 million in pcp).
• Net Income for the period stood at CAD 20.642 million, as compared to CAD 16.136 million in Q1FY20.

Source: Company Reports

Risks:  The products of the company are related to information technology, and requires constant innovation in order to remain afloat within the industry. Thus, the arrival of any new players with better offerings and at a lower price point may lead to price competition, which might hinder the company’s margin and clientbase.

Valuation Methodology (Illustrative): Price to Earnings

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group reported strong momentum from its hosted and maintenance segment due to increase traction from maintenance on the license agreements. Notably, the company has implemented cost efficiency programs and lowered its direct costs, which stood at 26.5% of the total revenue in Q1FY21 compared to 29.3% in Q1FY20. 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 Altus Group Ltd, CGI Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ENGH at the last closing price of CAD 57.47 on May 04, 2021.

One-Year Price Chart (as on May 04, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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