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 Updates:

• Constant reduction in total borrowings: In the recent past, the company has successfully lowered its total debt, which is a key positive and indicates prudent capital management. Notably, total borrowings stood at CAD 29.5 million, which is the lowest in the last five quarters. A lower borrowing led to higher financial flexibility and lower interest expenses. Notably, the debt-to-equity ratio of the company stood at 0.07x in Q3FY21, better than the industry median of 0.20x.

• Increase in dividend distribution: The company reported a higher dividend of CAD 106.853 million in 9MFY21, as compared to CAD 19.496 million in pcp. The above is impressive, as most of the companies are lowering their dividend distribution in order to retain their liquidity.

• Growth from Professional services: The company reported remarkable growth from its professional services, wherein it reported a revenue of CAD 53.076 million in 9MFY21, higher than CAD 47.329 million in pcp, supported by reaching several large project milestones coupled with an increased ability to perform work as physical distancing restrictions loosen in some regions.

Q3FY21 Financial Highlights:

• ENGH declared its quarterly result, wherein the company reported revenue of CAD 117.644 million, as compared to CAD 131.324 million in pcp. The slide was primarily due to a lower income from Software licenses and hosted and maintenance services segments, partially offset by improved performance from the Professional services segment.
• Result from operating activities was recorded at CAD 38.507 million, slide from CAD 42.198 million in pcp. The decline was primarily due to lower revenue, partially offset by lower direct costs and operating expenses.
• Income before income taxes stood at CAD 27.005 million as compared to CAD 33.323 million in pcp. The slide was due to a lower income from operating activities coupled with an increase in the other expense.
• Net Income for the period stood at CAD 21.227 million, as compared to CAD 25.993 million in Q3FY20, due to the above-mentioned facts.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks:  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.

Valuation Methodology Illustrative: Price to CF based  

Stock Recommendation: 

The company commands a higher margin than the industry median, which indicates higher operational efficiencies. EBITDA margin and operating margin stood at 35.4% and 23.9%, respectively, in Q3FY21, as compared to the industry median of 8.2% and negative industry median of 0.1%, respectively. Net margin was recorded at 18% in Q3FY21, as compared to the negative industry median of 3.8%. The company reported improved cost management and posted selling, general & administrative costs of CAD 68.885 million in 9MFY21, significantly lower than CAD 80.106 million in pcp. 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 Open Text Corp, Descartes Systems Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ENGH at the last traded price of CAD 56.30 on November 17, 2021.

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

Technical Summary Analysis

One-Year Technical Price Chart (as on November 17, 2021). Analysis by Kalkine Group

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

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