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:

• Total Debt is on a downtrend: The company has successfully lowered its total debt during the last five quarters, which is impressive considering the persisting economic turmoil where most of the companies are facing liquidity crunch and has increased their leverage. Notably, total borrowings stood at CAD 33.7 million, which is lowest in the last five quarters. A consistent decrease in debt reflects higher financial flexibility and lower interest expenses.

• Strong Margin profile: The company commands robust margin than its peers, which indicates excellent operational efficiencies and prudent cost management. In Q2 FY21, EBITDA margin and operating margin stood at 34.3% and 22.2%, respectively, significantly higher than the industry median of 8.7% and 1.3%. The company reported solid net margin of 17.7% in Q2FY21, as compared to the industry median of negative 4.5%.
  

• Bullish Management Stance: The company is planning to revive its operations through streamlining of the regionalized products into one unified global product, in order to better leverage R&D spend and further accelerate the transition to the cloud. The management is planning to utilize the growing demand for cloud-based services and would offer products within the same segment.

Q2FY21 Financial Highlights:

• ENGH declared its quarterly result, wherein the company reported revenue of CAD 117.334 million, declined from CAD 140.900 million in the previous corresponding period (pcp). The slide was primarily due to a significant fall in the Software license revenue as compared to previous corresponding quarter.
• Result from operating activities was recorded at CAD 36.892 million, down from CAD 46.276 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 26.279 million as compared to CAD 34.909 million in pcp. The decline 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 20.739 million, as compared to CAD 27.089 million in Q2FY20, due to the above-mentioned facts.

Source: Company Report

Risks:  In order to remain afloat within the industry, the products require constant innovations and upgradation. Hence, a higher R&D expense would likely dampen the company profitability.

Valuation Methodology Illustrative: Price to Cash Flow

Stock Recommendation:

Despite the ongoing sluggish economic condition, the company paid a significantly higher dividend of CAD 97.974 million in H1FY21, as compared to CAD 12.069 million in pcp. This is impressive as most of the companies has reduced or suspended their dividend distribution in order to retain liquidity. 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 Computer Modelling Group Ltd, Altus Group Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 61.03 on August 31, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 31, 2021). Analysis by Kalkine Group

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

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