Computer Modelling Group Ltd.

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.

Key Highlights

• Impressive Dividend Yield: The company reported consistent dividend payments despite the sluggish economic scenario, which is a key positive. Moreover, the group distributed a total dividend of CAD 8.031 million in H1FY22, at par with CAD 8.026 million in pcp. Notably, the stock of CMG carries a dividend yield of ~4.202% on an annualized basis, which looks attractive considering the persisting interest rates.

• Prudent Working Capital Management: The company reported its current ratio of 2.28x in Q2FY22, higher than the industry median of 2.00x. The above indicates that the company has ample current assets to meet its short-term liabilities. Moreover, the company has a lower cash cycle of 65.3 days, lower than the industry median of 84.6 days, which shows that the group is efficient to convert its investments in inventory and other resources into cash flows.

• Positive Outlook from Energy Transition-Related Modelling Segment: Due to the change in the emission norms and ongoing transition-related activities, the company is gaining higher traction for its new software and consulting contracts from this particular segment, which is a key positive. Notably, CMG has the technical capabilities to support energy transition-related modelling and is highly poised to grab opportunities available here.

Q2FY22 Financial Highlights

• CMG announced its second-quarter result, wherein the company posted its top line at CAD 15.949 million, lower than CAD 17.852 million in the previous corresponding period (pcp). The decline was primarily due to a decrease in both software license revenue and professional services.
• The company witnessed a surge in its operating expenses (CAD 10.509 million v/s CAD 7.991 million in pcp) due to higher research & development costs and an increase in general & administrative expenses and sales, marketing & professional services.
• Net and total comprehensive income stood at CAD 4.146 million, a decline from CAD 6.760 million in pcp, partially offset by lower finance costs and income taxes.

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks Associated with Investment

The company generated most of its revenue from the Annuity/maintenance licenses fees, which are primarily dependent on the oil and gas industry. Hence, due to lower capital expenditure by the oil and gas manufacturers, the company reported a slide in software license revenue across all geographic regions. Continuation of the above trend is likely to dampen its overall operations.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation

The oil & gas industry saw a demand revival in 2021, which is expected to be reflected in the company’s order book in the coming quarters, owing to an increase in annual spending budgets by the oil and gas companies. The company closed the quarter with CAD 48 million in cash, no debt, and no significant accounts receivable collectability concerns, indicating a solid financial position. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). We have peers such as Shawcor Ltd, Secure Energy Services Inc, etc. for this purpose. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last traded price of CAD 4.76 on November 23, 2021.

One-Year Technical Price Chart (as on November 23, 2021). Analysis by Kalkine Group

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

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