Enghouse Systems Limited

Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The group's operations are organized in two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Highlights:

• Strong Traction from video telehealth solutions: Due to the ongoing social-distancing measures and strict regulations, the company witnessed a tremendous growth across the telehealth services, wherein the company’s subsidiary Vidyo Inc. reported 1349% user growth in mobile usage and 936% user growth in desktop usage for its services, which is commendable. The management expects the momentum would likely to continue in the foreseeable future driven by the urgency of a user-friendly telehealth application on account of changing consumer preferences. 

• Robust Financial Metrics: Over the years, the company delivered strong operating metrics, driven by improved demand dynamics for its products, which is impressive. During FY15 to FY19, the company delivered a ~6.7% CAGR in its top-line, while Adjusted EBITDA recorded a CAGR of ~10.1% during the same time frame.         

Source: Company Presentation

• Impressive Product-offerings: The company has an attractive product-portfolio which includes network operations, network visualizing, cloud services, logistic management etc. With the growing needs for Information Technology, we believe the company is highly poised to cater to the increasing demand from both retail and corporates.           

Product Portfolio (Source: Company Presentation)

Q3FY20 Financial Highlights:

• ENGH announced its quarterly results, wherein the company posted total revenue of CAD 131.324 million, as compared to CAD 101.274 million in the previous corresponding period (pcp). The increase was driven by higher income from software licenses and hosted & maintenance services.
• Results from operating activities grew to CAD 42.198 million, significantly higher than CAD 27.017 in pcp, supported by higher revenue, partially offset by an increase in direct costs and operating expenses.
• Income before income taxes stood strong at CAD 33.323 million, as compared to CAD 18.827 million in pcp, supported by an increase in other income.
• The company reported net income of CAD 25.993 million, considerably higher than CAD 14.661 million in pcp.
• The company reported cash and cash equivalent of CAD 219.423 million, while total assets stood at CAD 758.099 million.

Q3FY20 Income Statement Snapshot (Source: Company Reports)

Risk associated with investment

The products of ENGH requires constant innovation to retain the market share and to stay afloat within the industry. Hence, the entrance of new firms with impressive offerings at a competitive price could pose a challenge for the company. Moreover, an increase in direct costs and higher research and development expenses could dampen the company’s margin.

Valuation Methodology (Illustrative): EV to Sales based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company showed strong operational performance driven by its acquisition strategies in the recent past and intends to enhance its geographical presence and introduction of new products to remain competitive. Higher traction from the telehealth services would support the company’s overall performance in the coming days and is a key positive. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering lower double-digit upside side potential (in % terms). We have considered industry (Technology) mean on NTM basis. Considering the above-mentioned facts, we have given a ‘Buy’ rating on the stock at the current closing price of CAD 63.83 on December 10, 2020.

1-Year Price Chart (as on December 10, 2020). ENGH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

CGI Inc.

CGI Inc. (TSX: GIB.A), is a Canada-based independent information technology (IT) and business consulting services company which delivers an end-to-end portfolio of capabilities, from IT and business consulting to systems integration, outsourcing services, and intellectual property solutions. CGI Inc works with clients through a local relationship model complemented by a global delivery network.

Key highlights 

• Strong operating metrics, deriving healthy cash flows: The company has delivered decent growth in its Adjusted EBIT and Adjusted EBIT margin during FY15-FY20, reflecting business resiliency which further ensured strong cash flows. The group maintained its Bill to book ratio at 118.8% during Q4 2020, the highest in the last eight quarters. The company aims to keep this ratio above the 100% mark.

• Improved client traction: Despite a slowdown in the overall economy, the group witnessed improved participation from its existing and new clients resulting in higher bookings, resulted in a superior cash generation. The company reported an impressive backlog of CAD 22.67 billion, representing 1.9x of the annual revenue. The group has derived 25% of its revenue from new business.

Source: Company

• Ample liquidity: The Company is maintaining a healthy balance sheet. As on September 30, 2020, the company’s cash and cash equivalents and investments represented CAD 1.73 billion with positive working capital of CAD 1.28 billion. The Company also holds CAD 1.49 billion under its unsecured committed revolving credit facility. It is generating a significant level of cash, which the management currently considers will allow the Company to fund its operations.

Source: Company 

Financial Overview

Source: Company 

• For FY2020, the Company posted a stable revenue of CAD 12.16 billion, increased by 0.4% as against CAD 12.11 billion in the previous corresponding period.

• Adjusted EBIT stood at CAD 1.86 billion in FY20, increased by 2.1%, as compared to CAD 1.82 billion in FY19, reflected an increase by 20 basis points in EBIT margin to 15.3% against 15.1%. The increase in Adjusted EBIT was mainly due to lower discretionary expenses due to COVID-19, synergies achieved through the optimization and modernization of the infrastructure business, savings generated from the Restructuring plan.

• The Company posted net earnings of CAD 1.11 billion in FY20, as against CAD 1.26 billion in the previous corresponding period.

Risks associated with investment 

The company provides technology and IT services to several business and corporates. A prolonged lockdown scenario may impact the backlog and order-book of the group. Further cybersecurity incidents, or deliberate attacks could cause or contribute to risk and uncertainty and could adversely affect business, results of operations and financial condition. 

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

In today’s digital era, there is a competitive urgency for organizations across industries to become digital in a sustainable way. The company is well poised to continue and is working with clients across the globe to implement digital strategies and solutions that revolutionize the customer experience, drive the launch of new products and services, and deliver efficiencies and cost savings. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 95.49 as on December 10, 2020. We have considered TTEC Holdings Inc, F5 Networks Inc, Constellation Software Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on December 10, 2020).Source: Refinitiv (Thomson Reuters)

Real Matters Inc

Real Matters Inc (TSX: REAL) is a Canadian network management services provider to the mortgage lending and insurance industries.

Key Highlights:

• Focusing on margin expansion in US appraisal segment: The company is seeking for investing in technology and is expected to reduce ~20% of its operational costs, which would lead to a net margin improvement of 220 bps to 420 bps by FY25, which is a key positive. Moreover, the segment has delivered improvement net revenue margin and adjusted EBITDA margin in FY20 at 23.8% and 59.3%, respectively, improved from 20.6% and 30.4% FY18.                        

Source: Company Presentation

• Strong Cash Conversion: The group reported a stupendous cash conversion ratio of 87% in FY20, increased from 48% in FY18, driven by strong cash flow from operations. However, the company is targeting to maintain the cash conversion within the range of 72% to 75% till FY25.                     

Source: Company Presentation

• Optimistic FY21 Targets: The company is focusing on improving its market share and consolidate net revenue margins for FY21, which is commendable. The company targets its US appraisal market share to grow to 15% to 20% from existing 11.7%, while net revenue margin is expected to remain within 35% to 40%.

Source: Company Reports

FY20 Financial Highlights:

• REAL impresses with its FY20 performance, wherein the company posted revenue of USD 455.945 million, reflecting a 41.4% growth over FY19. The increase was aided by increased traction from both the US and Canadian markets due to higher market volumes serviced. However, the increase was partially offset by lower insurance inspection revenues due to COVID-19.
• Income before income tax expense stood at USD 61.464 million, significantly higher than USD 14.304 million in the previous financial year, thanks to the higher revenue.
• Adjusted EBITDA stood at USD 72.242 million, soared 149.3% on y-o-y basis, while adjusted EBITDA margin improved to 44.6%, as compared to 28.6% in FY19.
• The company’s net income grew to USD 42.798 million, from USD 10.094 million in FY19.
• Cash and cash equivalent stood at USD 129.156 million, while total assets were recorded at USD 249.724 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risk associated with investment

The company’s business can be impacted by seasonality and industry cyclicality. Moreover, interest rate volatility and refinancing rate may impact the overall performance.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company intends to maintain a strong balance sheet with ample liquidity (~USD 40 million as undrawn credit facility) and is targeting its leverage ratio within the range of 1x to 1.5x. At the end of fiscal 2020, the company reached or surpassed three of its four fiscal 2021 targets. These accomplishments reflect how prudently the company is managing its operations. Along with this, the company is also targeting to double the market share of the US Appraisal segment by FY2025. The company is continuously buying its share under NCIB; this showcases the confidence and optimism of management in the business. We have valued the stock using Price to cash flow based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered industry (Software and IT Services) median on NTM basis. Considering the above-mentioned facts, current trading levels, improved macro scenario, we have given a ‘Buy’ rating on the stock at the closing price of CAD 19.03 on December 10, 2020.

REAL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Absolute Software Corp.

Absolute Software Corp. (TSX: ABST), delivers a cloud-based service that supports the management and security of computing devices, applications, and data for a variety of organizations globally. The company’s differentiated technology is rooted in its patented Persistence technology, which is embedded in the firmware of laptop, desktop, and tablet devices by most the world’s largest global computer manufacturers (“PC OEMs”).

Key highlights

• Growth strategy: The group believes that due to increased remote work and distance learning, the demand for the security and management of computing devices, applications, and data has been increased. As the company do not want to be solely reliant on network-based security, it is increasing its focus on securing the actual endpoint devices. As a result, the company sees an opportunity for further growth across North America and in other global regions in each of the enterprise, government, and education verticals.

• Strong balance sheet: The company is having a strong balance sheet with net cash position and sufficient liquidity to support its business objectives in the coming fiscal year. Liquidity was further bolstered by USD 63.5 million on October 30, 2020, with the completion of a public offering of common shares.

• Intellectual Property and Patent Portfolio: As on September 30, 2020, the group has a global portfolio of 140 issued patents and 30 patent applications in process. These patents cover a broad range of software and communication technologies and have varying expiry dates. 

Financial overview of Q1 2021

Source: Company

• In Q1 2021, total revenue increased by 11% to USD 28.5 million as compared to USD 25.7 million in Q1 2020, driven by a 12% increase in recurring commercial revenue.
• Total Annual Recurring Revenue posted in Q1 2021 was USD 111.7 million, increased by 13% as against USD 99.1 in Q1 2020. Approximately 67% of total ARR was represented by Enterprise and Government vertical customers and rest 33% by Education vertical customers.
• In Q1 2021, the company posted Adjusted EBITDA of USD 8.1 million, or 29% of revenue, as compared to USD 7.1 million, or 28% of revenue, in Q1 2020.
• The Company recorded net income of USD 2.6 million in Q1 2021, down by 25% as compared to USD 3.5 million in Q1 2020, due to unrealized foreign exchange loss.
• The company paid a quarterly dividend of CAD 0.08 per common share during Q1 2021.

Source: Company 

Risks associated with investment

The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. As the company is in the Information technology sector hence, the significant risk of technological change arises. Other risks are also there such as the company’s business strategy, evolving industry standards, intense competition, Currency fluctuations etc. 

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company is continuously expanding its Global Resilience Ecosystem; at present, the company has approximately 40 independent endpoint security and productivity tool applications which help customers ensuring their mission-critical security controls remain healthy and undeletable. We expect that the company’s ARR, which results from customer term subscriptions to its software service, will continue to provide revenue stability, profitability, and cash flow. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 12.94 on December 10, 2020. We have considered Kinaxis Inc, Real Matters Inc, Open Text Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Computer Modelling Group Ltd.

Computer Modelling Group Ltd. (TSX: CMG) is a Canada-based computer software technology company serving the oil and gas industry. The Company operates through the development and licensing of reservoir simulation software segment. 

Key highlights

• Healthy margins: The company is enjoying a decent margin profile and maintaining consistency. The average EBITDA margin over the last ten quarters stood at 47.8% and average Net margin over the same period stood at 30.7%. In Q2 2021 the company has crossed these average margins level and posted spectacular margins.

Source: Refinitiv (Thomson Reuters)

• Consistent dividend payment: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. On November 12, 2020, the company approved a quarterly dividend of CAD 0.05 per share, payable on December 15, 2020, with a record date of December 7, 2020. At the last closing price, the stock was offering a yield of 3.92%, which is decent looking at the current interest rate environment. 

Financial overview of 2Q 2021

Source: Company

• In Q2 2021, the company’s revenue decreased by 10% to CAD 17.85 million as against CAD 19.87 million in the previous corresponding period. Annuity/maintenance license revenue decreased by 14% to CAD 14.1 million, primarily due to the ongoing disruption to the oil and gas industry caused by the COVID-19 pandemic, consolidations in the industry and reduced activities. In contrast, the Perpetual licenses revenue increased by 55% to CAD 1.77 million.
• Operating profit as a % of total revenue stood at 55% in Q2 2021 as against 47% in the previous corresponding period mainly due to the first and second quarter CEWS benefits both being recorded in this quarter, combined with compensation reductions.

• On the back of lower operating expenses due to the above-stated reasons, the company managed to post net income of CAD 6.7 million in Q2 2021, as against CAD 6.8 million in the previous corresponding period. 

Risk associated with investment

Due to high dependency on the oil and gas clients, adverse effect on crude oil demand can hit revenues of the company. Lower demand for crude oil would result in lower drilling activity by the oil producers resulting in lower budget allocation for the software and maintenance purposes.

Stock recommendation

The company is focused on ensuring the resilience of its business by adjusting the cost structure. It has taken various cost reduction measures and is preserving its liquidity and maintaining a strong balance sheet to deal with these uncertain times. The group settled the quarter with decent numbers such as CAD 44.0 million of cash with zero net debt in the books and realized free cash flow of CAD 7.4 million. However, the company is serving the oil and gas industry, which saw lower demand in the past some quarters. We believe as the industries start working on their full capacity again, the demand for oil and gas will get a push. On the valuation front, the stock is available at Price to Earnings multiple of 18.5x on TTM basis compared to the industry average of 42.5x. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 5.1 December 10, 2020.

Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.