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 into two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Updates:

• Recent Acquisition: On December 30, 2021, the group acquired Altitude Software, a Portugal based company, which provides omnichannel contact center solutions for small and large businesses and operates in the business process outsourcing (BPO) market segment. Notably, the group derives more than CAD 30 million in revenue and has a client base of more than 300 customers. With the above acquisition, the group would enhance its presence across Latin America countries like Spain, Brazil, Mexico and Portugal, which would further support the company’s upcoming business prospects.
• Product Innovation as per changing consumer preferences: Recently, the company has upgraded the interfaces of its VidyoRoom Solutions, with three new in-office video conferencing experiences. With the growing trend of work from home culture, ENGH has released new video-enabled office interfaces which would allow remote employees to attend multiple-conferences from their homes.

Q4FY20 Financial Highlights:

• ENGH announced its quarterly results, wherein the group posted revenue of CAD 120.898 million, reflecting a growth of ~10.6% on y-o-y basis. The increase was driven by higher hosted and maintenance revenue, primarily attributable to hosted Vidyo sales as well as incremental maintenance on new license sales, net of churn on existing customers, and the addition of new product offerings.
• Result from operating activities stood at CAD 42.697 million, surged 31.2% on y-o-y basis. The increase was supported by higher revenue, partially offset by slightly higher operating expenses (CAD 44.952 million versus CAD 43.731 million in pcp).
• Income before income taxes stood at CAD 32.794 million, versus CAD 25.016 million in Q4FY19. The quarter was marked by higher amortization of acquired software and customer relationships costs (CAD 10.958 million versus CAD 9.244 million in pcp), partially offset by Foreign exchange gains of CAD 0.850 million versus CAD 0.367 million in pcp.
• Net Income for the period stood at CAD 29.372 million, as compared to CAD 24.687 million in Q4FY19.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: The groups operates within the IT space and requires constant innovation in order to remain competitive within the industry. Hence, the entrant of new players with lucrative offerings at a competitive price would lead to price competition, which might hinder the group’s margin. Moreover, higher direct costs and higher research and development costs could dampen the group’s profitability.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation

During FY20, the group reported a significant growth in sales as the products matched as per the changing demand dynamics. With the increased global focus on video communications and healthcare, the Group’s products remain well-positioned to deliver a wide range of video communications solutions in the foreseeable future. Moreover, the group reported exponential growth in its operating cash flows, which increased to CAD 168.145 million, from CAD 81.375 million in pcp, which is a key positive. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered peers like Altus Group Ltd, Open Text Corp etc. Considering the above-mentioned facts, current trading levels, we give a ‘Buy’ rating on the stock at the current closing price of CAD 63.48 on January 25, 2021.

Source: Refinitiv (Thomson Reuters)

Gibson Energy Inc.

Gibson Energy Inc. (TSX: GEI) is a Canada-based integrated service provider to the oil and gas industry with operations across producing regions throughout North America. The Company is engaged in the movement, storage, blending, processing, marketing and distribution of crude oil, condensate, natural gas liquids (NGLs), water, oilfield waste and refined products. 

Key highlights 

• An income play:Recently, the company paid a quarterly dividend on 15th Jan 2021 of CAD 0.34 per common share. The group has a healthy practice of dividend pay-out; this translates in an essential factor for regular income-seeking investors with a long-term horizon. Moreover, the group has a decent track record of dividend distribution. At the last closing price, the stock was offering a dividend yield of 6.34%, which was higher than the yield of the TSX Composite of 3.32%. 

• Ample liquidity: At Sept 30, 2020, the company had access to over CAD 800 million in liquidity through revolving credit facility, bilateral facilities and cash on the balance sheet, which seems to be sufficient to withstand the challenging operating environment. Furthermore, the group do not hold any debt maturities until 2025. A critical ratio of Net Debt / Adj. EBITDA for the company in Q3 2020 stood at 2.7x relative to 3.0x – 3.5x target.

Source: Company 

• Guidance on 2021 Capital Budget: The group has proposed CAD 200 million for growth capital expenditures in 2021 and in addition to this between CAD25 - CAD30 million are allocated as replacement capital expenditures in 2021. Half of this planned CAD 200 million capital spend would be on projects beneficial on an ESG and Sustainability basis. The company would meet all obligations from internal sources. This funding position is sustained from the growth of the Company’s Infrastructure businesses and outperformance and increasing retained cash flows. 

Financial overview of Q3 2020 (Amounts in thousands of Canadian dollars)

Source: Company 

• In Q3 2020, the Company reported a decline in revenue to CAD 1.36 billion, compared to CAD 1.99 billion in the previous corresponding period. The degraded revenue was primarily due to lower income from the marketing segment, partially supported by an improved infrastructure revenue.
• In the reported quarter, gross profit stood at CAD 73.2 million, against CAD 92.5 million in Q3 2019.
• Operating income stood at CAD 57.1 million in Q3 2020, against 87 million in Q3 2019, the decline was primarily due to higher G&A expenses that rosed to CAD 15.3 million vs CAD 6.6 million.
• The Company reported Net income of CAD 17.5 million in Q3 2020, against CAD 48.3 million in Q3 2019. A drop in revenue, along with higher operating expenses and finance cost, were the main reasons behind low net income. 

Risks associated with investment

The company’s revenues are correlated to oil prices. Any volatility in oil prices would affect the group’s performance. Another factor that could impact the financial performance is a low demand for oil and gas. 

Valuation Methodology (Illustrative): EV to EBITDA 

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

Stock recommendation

The company reported impressive performance from its infrastructure segment due to additional tankage brought into service, coupled with stable fee-based contracts. On the other side, the marketing segment has remained soft in the recent past. Furthermore, we believe the gradual reopening of economic and industrial activities would likely improve the commodities prices in the foreseeable future and drive the company’s revenue and margins. Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 20.21 as on January 25, 2021. We have considered Keyera Corp, MEG Energy Corp, Inter Pipeline Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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