Constellation Software Inc

Constellation Software Inc. (TSX: CSU) is engaged in the development, installation, and customization of software. They acquire, manages, and builds vertical market software (VMS) businesses. The company is catering its services to both segments, the public sector, and the private sector.

Key Highlights

• Positive Net cash flows from operating activities: In Q3 2020, the company posted positive cash flows from operating activities of USD 234 million, up USD 57 million or 32% compared to USD 177 million on Y-o-Y basis. Free cash flow available to shareholders also increased USD 47 million to USD 181 million compared to USD 134 million on Y-o-Y basis.

Source: Company

• Liquidity:The company has shown a strength to increase their Cash by USD 249 million to USD 565 million at September 30, 2020, compared to USD 316 million at December 31, 2019, and its bank indebtedness decreased by USD 104 million to USD 176 million at September 30, 2020, compared to USD 280 million at December 31, 2019.
• Acquisition on a final stage:In May 2020, the company entered into a binding agreement with IJssel B.V. to purchase 100% of the shares of Topicus.com B.V., a Netherlands-based diversified vertical market software provider. The acquisition is likely to close in 2020. We believe this acquisition will enhance the Company’s presence into new geography and augurs well for the overall revenue growth.
• Dividend: The Company declared a dividend of USD 1.00 per share to all common shareholders paid on October 9, 2020, with a record date of September 18, 2020.

Financial Overview of Q3 2020 (In millions of U.S. dollars, except per share amounts)

Source: Company

• In Q3 2020, the company posted a robust set of numbers, wherein it reported a revenue of USD 1,003 million, an increase of 15%, or USD 133 million, compared to USD 870 million in the previous corresponding period, primarily attributable to growth from acquisitions as the company faced negative organic growth of 1%.
• The principal reason for the pessimistic organic growth in the reported quarter was the impact of COVID-19 as the travel restrictions have negatively impacted the ability to implement software, and many businesses have put buying decisions on hold.
• Total expenses for the quarter increased by 8%, or USD 51 million to USD 697 million, compared to USD 647 million in pcp. As a percentage of total revenue, expenses equalled 70% in Q3 2020 and 74% for Q3 2019.
• The company has posted Net income of USD 122 million compared to net income of USD 82 million in pcp.

Risk associated with investment

A further breakout of covid-19 might result in cancellation by individual customers of their ongoing software maintenance contracts and the suspension or revocation of new software purchases. The pandemic may also harm many of the customers, including their ability to fulfil ongoing payment obligations to the company, which could increase the company’s bad-debt exposure, another critical risk involves the fluctuation in foreign currency compared to USD.

Valuation Methodology (Illustrative): Price to Cash Flow

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

In Q3 2020, the company posted a robust set of numbers, wherein they reported a revenue of USD 1,003 million, an increase of 15%, or USD 133 million, compared to USD 870 million on Y-o-Y basis. With ample liquidity in hand along with positive free cash flow available to shareholders of USD 181 million, allows the company to expand its wing in new territories through acquisitions. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 1531.72 on November 5, 2020. We have considered Intuit Inc, Enghouse Systems Ltd, Accenture PLC etc., as the peer group for the comparison.

CSU daily technical chart. Source: Refinitiv (Thomson Reuters)

Intact Financial Corp

Intact Financial Corp (TSX: IFC) is a leading property and casualty insurance company providing its services in the US and Canada. Its lines of business include personal auto, personal property, commercial lines Canada and commercial lines US.

Key Highlights

• Decent Premium Growth: In Q3 2020, total Premiums grew 8%, driven by a decent growth in Canadian market. In Canada, premium growth of 9% in the quarter was driven by strong retention and new business and included the benefit of The Guarantee acquisition.

Source: Company

• Maintaining a strong capital position:The company’s Canadian operations have an MCT of 205%, and US subsidiary has RBC of 451%, both at substantially high levels. The company’s total capital margin, which is based on a 165% MCT effective April 1, 2020, stood at a robust CAD 1.9 billion. By maintaining a strong balance sheet and capital position, the company can withstand the shocks driven by volatility in financial markets. The strong balance sheet positions the company well to capture growth opportunities.

Source: Company

• Dividend: The company has a long history of distributing dividend, and as each year passes, we saw an increment in it. This translates in an essential factor for regular income-seeking investors with a long-term horizon. The company has declared a quarterly dividend of CAD0.83 per share payable on December 31, 2020, with a record date of December 15, 2020.

Source: Company

Financial Overview of Q3 2020

• In Q3 2020, The company reported higher Net earned Premiums of CAD 2,864 million as compared to CAD 2,604 million in the previous corresponding period, aided by growth in direct premium written.
• The company posted total revenue of CAD 3,127 million as compared to CAD 2,828 million in pcp. Decent growth was witnessed by both the US as well as from Canada region.
• Net operating income registered a growth of 48% to CAD 411 million in Q3-2020, excluding share of profit from investments in associates and joint ventures, reflecting strong growth in underwriting income and Distribution EBITA and Other.
• Earnings per share increased by 79% to CAD 2.25 in Q3 2020 driven by growth in net operating income. 

Risk associated with investment

The company is not immune to the risks present in the industry. Some of the highlighted risks include adverse economic conditions which may decrease the estimated value of the collateral securing loans and leases. COVID-19 pandemic could lead to financial losses in the company's portfolio and a decrease in its net income and book value. Any of these events, or any other circumstances caused by turmoil in world financial markets, may have a material adverse effect on the business and financial condition. 

Valuation Methodology (Illustrative) – Price to Book Value

Stock recommendation

The company reported a decent quarterly result amid a challenging time. Based on a strong balance sheet, low payout ratio, healthy growth in premiums and resilient operating income, the company can support its customers, pay its dividends, while continuing to invest in its strategy. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 145.05 on 5 November 2020. We have considered Power Corporation of Canada, Fidelity National Financial Inc, Brown & Brown Inc etc. as the peer group for the comparison.

IFC daily technical chart. 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.