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 highlights

• Expanding territories through acquisition: Recently, the company acquired “Altitude”, which provides omni-channel contact centre solutions for small and large organizations, focusing on the business process outsourcing market segment. The acquisition of Altitude would extend its presence to Portugal and further expand its operations in Spain, Brazil, and Mexico, enabling it to capture additional opportunities within these markets.

• Improved cash flows: The company reported solid cash flows from operations. During Q1 2021, the company’s operating cash flows, excluding changes in working capital, increased 18.6% to CAD 41.7 million on improved operating profitability against CAD 35.2 million in the previous corresponding period.

• Better than industry margin profile: The group reported strong operational performance, which led to solid margins. It outperformed the industry margin profile, which is a key positive. In Q1 2021, the group reported EBITDA margin, operating margin, and a net margin of 46.4%, 25.1% and 17.3%, respectively, which was higher than the industry median of 9.0%, 2.2% and -2.1%.

• Increase in dividend distribution along with a special dividend: The Company’s resilience, robust numbers and healthy cash flow generation helped in announcing a quarterly dividend of CAD 0.16 per common share, an increase of 18% over the prior dividend, payable on May 31, 2021. Moreover, recently, it disbursed a special dividend of CAD 1.50 per common share. 

Financial overview of Q1 2021 (In thousands of CAD)

Source: Company

• In Q1 2021, the company posted revenue of CAD 119.1 million, a 7.6% increase compared to revenue of CAD 110.7 million in the previous corresponding period, mainly driven by the rise in hosted and maintenance revenue.
• The result from operating activities stood at CAD 40.7 million, surged 32.1% over CAD 30.8 million in Q1 2019. The increase was supported by increased revenue, partially offset by higher operating expenses (CAD 46.5 million versus CAD 45.7 million in Q1 2019).
• Income before income taxes stood at CAD 26.1 million, significantly higher than CAD 20.7 million in pcp. The quarter marked higher amortization of acquired software and customer relationships costs and foreign exchange losses and higher finance expense.
• Net Income for the period stood at CAD 20.6 million compared to CAD 16.1 million in FY19. 

Risks associated with investment

The company offers several IT-related services, and the products require constant innovation to remain competitive within the industry. Thus, the arrival of any new players with attractive proposition would lead to price competition, which might hinder the company’s margin and client-base. 

Valuation Methodology (Illustrative): EV to Sales

Note: All the forecasted figures are taken from Thomson Reuters. 

Stock recommendation

The company’s recent acquisition of Portugal based BPO company Altitude Software is likely to deliver improved business prospects in the coming quarters through its modular software suite, which supports all media channels through its strong inbound and outbound capabilities for both on-premises and hosted contact centre activities. Furthermore, the company outperformed the industry margin profile, with substantial cash balances, no debt, and significant operating cash flow are all considerable aspects. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 59.55 on April 05, 2021. We have considered Descartes Systems Group Inc, Kinaxis Inc, Docebo Inc, etc. as the peer group for the comparison.

1-Year Price Chart (as on April 5, 2021). Source: Refinitiv (Thomson Reuters)

Pretium Resources Inc.

Pretium Resources Inc. (TSX: PVG) is engaged in the acquisition, exploration, development and operation of precious metal resource properties in America. The Company’s assets include Brucejack mine, Bowser Claims and the Porphyry Potential Deep Drilling (PPDD) Project.

Key highlights 

• Higher guidance for 2021: The management shared higher guidance for 2021, assuming there is no new significant impact on the Brucejack Mine operations. The gold production is expected to be in a range of 325,000 - 365,000 ounces. Furthermore, they expect the free cash flow in the range of USD 120.0 - 170.0 million, at a gold price of USD 1,700 per ounce.

Source: Company

• Significantly reduced bank debt:The company repaid USD 226.7 million of debt, including a discretionary payment of USD 160.0 million using the cash generated from operations and proceeds from the sale of Snowfield. 

• Strong Free Cash Flows:On the back of robust operations coupled with a high realized price of gold helped the company to generate healthy cash from operations, which stood at USD 317.3 million compared to USD 225 million in FY 2019. Free cash flow came at USD 369.2 million, exceeding the revised free cash flow forecasted range of USD 205.0 - 275.0 million, based on an average realized gold price of USD 1,800 per ounce.

Source: Company 

• Rising cash and cash equivalents: On December 31, 2020, the company reported total cash and cash equivalents of USD 174.7 million, increasing by USD 151.5 million from USD 23.1 million against the previous corresponding period. The increase in cash and cash equivalents was primarily due to the rise in cash flows generated from the Brucejack Mine operations and proceeds from the sale of Snowfield.

Source: Company 

Financial overview of FY2020

Source: Company

• For the year ended December 31, 2020, the Company generated revenue of USD 617.5 million, against USD 484.5 million in the previous corresponding period. The increase in revenue was the result of higher gold prices realized on ounces sold in the period.
• The Company reported a higher operating income at USD 200 million, against USD 132.7 million in FY2019. The rise was primarily due to higher revenue and lower cost of sales as % to revenue, which came to 64.1% Vs 68.7% in pcp.
• The Company posted a net loss of USD 38.4 million in FY2020, against a profit of USD 40.9 million, primarily as they booked a loss on exploration and evaluation asset sales coupled with higher income tax expense.

Risks associated with investment

The Company’s financial performance is mostly dependent on the gold price, which directly affects its profitability, margins and cash flows. Any volatility in price or demand could impact the financial performance.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

For the company FY2020, proved to be an exceptionally challenging year, yet they achieved financial and production guidance. For the first time in history, they also improved their mineral reserve reconciliation compared to previous years, which is appreciable. Furthermore, the company ended 2020 with higher cash and cash equivalents of USD 174.7 million, increased by USD 151.5 million against 2019, and repaid USD 226.7 million of debt. The management also shared higher guidance numbers for 2021. Hence, based on the rationale discussed above and valuation, we recommend a “Buy” rating at the closing price of CAD 14.10 on April 5, 2021. We have considered Yamana Gold Inc, First Quantum Minerals Ltd, and First Majestic Silver, etc. as the peer group for the comparison.

1-Year Price Chart (as on April 5, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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