Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization.

Why Should Investors book profit?

• Lengthy cash conversion period: The company reported a higher cash conversion period of 87.7 days in Q3FY22, as compared to the industry median of 76.2 days. This indicates that the company is taking longer period to convert its investments to cash flows.

• Highly leveraged balance sheet: At the end of Q3FY22, the company reported its D/E ratio of 0.88x, as compared to the industry median of 0.39x. This is an indication of lower financial flexibility of the firm. Additionally, long-term debt stood higher at 45% in Q3FY22, as compared to the inductry median of 19.4%, which illustrates greater balance sheet risks.

• Weak operational metrics: Despite a surge in top-line, wherein the company reported its total revenue in Q3FY22 (CAD 17.05 million in Q3FY22 v/s CAD 16.04 million in Q3FY21), the company failed to retain the momentum and reported net income of CAD 5.57 million in Q3FY22, as compared to CAD 5.88 million in Q3FY21. Additionally, the company’s operating margin and pretax margin stood lower at 45.5% and 42.9%, respectively, as compared to 52.6% and 46.2%, in pcp.
  

 Valuation Methodology (Illustrative): Price to Earnings based

Analysis by Kalkine Group 

Stock recommendation

The company reports its major revenue from the Annuity/maintenance licenses fees, which are primarily depends on the oil and gas industry. Hence, due to lower capital expenditure allocation by the oil and gas manufacturers in the recent past, the company reported a slide in software license revenue across the geographic regions. Continuation of the above trend is likely to dampen the order book.

We have valued the stock using the PE-based relative valuation method and have arrived at a single-digit downside (in percentage terms). For the said purposes, we have considered peers like Pulse Seismic Inc, Andrew Peller Ltd etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the closing price of CAD 5.30 on February 23, 2022.

One-Year Technical Price Chart (as on February 23, 2022). Analysis by Kalkine Group

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

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