Growing Digitization to Support Business Prospects: Open Text Corporation (TSE: OTEX) enables organizations to gain insight through market-leading information management solutions, on-premises or in the cloud.

On April 30, OpenText announced a strategic agreement with Amazon Web Services (AWS). The collaboration with AWS will allow a smooth transition of its customers to the cloud. 

OTEX declared a dividend of US$ 0.1746 per share, payable on May 29, 2020.

Q3FY20 Operational Highlights: OTEX came up with an impressive set of numbers, wherein the Company reported total revenues of US$ 814.68 million, as compared to US$ 719.14 million in pcp. The increase in the revenue was supported by a stellar performance from cloud services and subscriptions segment followed by improved customer support revenue, which was partly offset by lower License income. Gross profit stood higher at US$ 532.49 million, improved from US$ 479.51 million in Q3FY19, thanks to higher income, partially offset by a surge in the total cost of revenues. Adjusted income from operations fell to US$ 234.68 million from US$ 236.81 million in the prior year period. The decline was due to higher research & development, sales & marketing, general & administrative expenses. Adjusted net income fell to US$ 166.31 million as compared to US$ 173.00. Lower income from operations remained a drag on the bottom line. Operating Cash flows grew by 15.2% on y-o-y basis to US$ 329.6 million.

Q3FY19 Financial Highlights (Source: Company Reports) 

Valuation Methodology (Illustrative): EV/Sales based Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock remained resilient in the recent past despite heightened volatility in the market, reporting a ~4% gain in the last nine months. Open Text Corporation provides customized information management services and cloud-based services to the organizations. With the growing demand for the company’s offerings, OpenText has reported revenue growth in the past 21 consecutive quarters on a constant currency basis. The Company has strong clientele and derives strong recurring revenues, which represent about 81% of the total revenues.  The strong recurring revenues ensure consistent cash flows for the business. Recent collaborations with Amazon Web Services (AWS) would simplify and accelerate customers' transition to cloud services. Due to changing business dynamics, we expect more organizations to lean toward digital-services and cloud-based platform, which would support the Company’s top-line in coming years. The stock is currently trading at a forward EV/Sales multiple of ~4x and we expect the multiple to expand based on above mentioned facts.  We have valued the stock with at target multiple of 4.3x (forward EV/Sales) and arrived at a target price which implies a potential upside in double-digit (in percentage terms). Hence, we recommend a ‘Buy’ on OTEX stock at the closing price of CAD 53.33 on 1 May 2020.

OTEX One-Year Daily Price Chart (Source: Thomson Reuters)

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