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 operates through two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Highlights:

• Robust margins: The group reported strong operational performance over the years and commands a considerably better margin against its peers. EBITDA margin in Q1FY21 stood at 34.3%, as compared to the industry median of 6.8%. Moreover, the group reported operating margin and a net margin of 22.2% and 17.7%, respectively, compared to the industry median of (1.1%) and (3.8%), respectively. The above indicates better cost management and prudent capital allocation.
  

• Recent acquisition of Nebu BV to diversify product offerings: Recently, the company acquired Nebu BV, which is an Amsterdam based company that offers market research and data analytics software solutions. This is expected to diversify the company’s offerings, which would help in higher customer acquisition. Services like data collection engine and availability of additional services automate cleaning, restructuring, processing etc., within a single platform is likely to boost the company’s offerings in the coming days.
  

• Surge in Dividend Payment amidst the economic turbulence: For the first half of FY21, the company paid a higher dividend to its shareholders, which is encouraging. In H1FY21, the company paid a dividend of CAD 97.974 million, significantly higher than CAD 12.069 million in the previous corresponding period (pcp).
  

Q2FY21 Financial Highlights:

• ENGH declared its quarterly result, wherein the company reported revenue of CAD 117.334 million, as compared to CAD 140.900 million in the previous corresponding period (pcp). The decline was primarily due to a significant fall in the Software license due to significantly higher sales of Vidyo in the previous corresponding quarter.
• Result from operating activities stood at CAD 36.892 million, down from CAD 46.276 million in Q2FY20. The decline was primarily due to lower revenue, while subsequently lower direct costs and operating expenses supported the profitability.
• Income before income taxes stood at CAD 26.279 million as compared to CAD 34.909 million in pcp. The decline was primarily due to lower income from operating activities coupled with an increase in the other expense.
• Net Income for the period stood at CAD 20.739 million, declined from CAD 27.089 million in Q2FY20, reflecting a decline of 23.4% on y-o-y basis.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks:  In order to remain afloat within the industry, the products require constant innovations and upgradation, which could weigh on the profitability.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company’s portfolio consists of software and services solutions which caters to several unique verticals such as cable operators, network telecommunication providers, media, transit, defence and public safety companies. Thus, the demand for its products is likely to remain stable in the coming days. Moreover, the recent acquisition is likely to bolster the company’s overall product and its presence across new geography. We have valued the stock using the Price to CF 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, Kinaxis Inc etc. Based on technical analysis, the stock has support at CAD 49.0 level. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ENGH at the last closing price of CAD 56.85 on July 06, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on July 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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