Absolute Software Corporation

Absolute Software Corporation (TSX: ABST) is engaged in the development, marketing, and provision of a cloud-based endpoint visibility and control platform. The company provides management and security of computing devices. Geographically, the group generates majority of revenue from the United States and also has a presence in Canada and the Rest of the world. 

Key Highlights:

• Acquisition of NetMotion Software, Inc.: Recently, the company confirmed the acquisition of NetMotion Software, Inc., at a price consideration of USD 340 million. The group provides connectivity and security solutions like zero trust network access (ZTNA) and mobile-first enterprise VPN functionality. With the above acquisition, the group would secure a highly relevant position within the mobile with an enterprise-grade VPN segment, which would allow its customers to efficiently move through the transition to more modern security expectations of Zero Trust and SASE.
• Elevated growth within the Endpoint security services: The company has reported consistent growth in its Annual Recurring Revenue (ARR), which denotes stable income generation. The company is a leader within the endpoint security service segment, while a growing need for these services has resulted in impressive growth in ARR in the recent few years. We expect the momentum to continue due to the growing adoption of cloud and managed service subscriptions from existing and newly acquired customers.
• Significant surge in cash from operations: At the end of 9MFY21, the company reported a solid growth in its cash flow from operations, which increased to USD 35.393 million, as compared to USD 13.386 million in the previous corresponding period (pcp), supported by improved working capital management. A higher cash from operation amidst the ongoing economic turbulence, is a healthy sign.
• Event Update: The company would announce its full-year FY21 financial result for the year ended June 30, 2021, on August 10, 2021.

Q3FY21 Financial Highlights:

• ABST announced its quarterly result, wherein the company posted its revenue of USD 30.653 million, higher than USD 26.061 million in the previous corresponding period (pcp). The increase was driven by a strong performance from the United States and the Rest of the world, partially offset by lower sales from Canada.
• Gross margin surged to USD 26.762 million, from USD 22.678 million in Q3FY20, supported by higher revenue, partially offset by an increase in the cost of revenue.
• The group reported a surge in operating expenses due to higher sales and marketing costs, higher research & development expense, and higher general and administration costs. Operating income stood at USD 3.225 million, higher than USD 3.179 million in pcp.
• The company reported a net income of USD 2.233 million, slightly lower than USD 2.258 million in pcp.

Source: Company Report

Risks: The company reported a surge in its input costs, and the continuation of the above trend is likely to impact the company’s margin, profitability and cash flows.

Stock Recommendations:

For 9MFY21, the company reported a 16% y-o-y growth in recurring revenue at USD 86.2 million, supported by expansion through its recent acquisitions, which is a key positive. Moreover, the recent acquisition of NetMotion Software, Inc. is likely to enhance the company’s offerings and client base. On the valuation front, the stock is available at an EV to Sales multiples of 3.9x on an NTM basis, as compared to the industry (Technology) median of 4.2x. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 17.11 on July 30, 2021.

One-Year Technical Price Chart (as on July 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

5N Plus Inc.

5N Plus Inc. (TSX: VNP) is a Canada-based company producing specialty chemicals and engineered materials. It provides a range of technologies to manufacture products which its customers use in several advanced electronics, optoelectronics, pharmaceutical, health, renewable energy and industrial applications. 

Key highlights

• Guidance on FY2021 Adjusted EBITDA: After consolidating AZUR, the Adjusted EBITDA for the company as per management is expected to be in the range of USD 25.0 million to USD 30.0 million in 2021. Furthermore, when the lower end of the forecast is taken into consideration, gross margin is projected to stay around 25%, which seems healthy.
• Improving its operational efficiency: In Q1 2021, the company’s Eco-Friendly Materials segment delivered strong results with Adjusted EBITDA margin reaching record levels. Over the recent years, it has been developing Eco-Friendly Materials along with higher margin businesses, reducing the segment’s exposure commodity prices and improving its operational efficiency. The first quarter results in 2021 reflect the culmination of these actions working in concert with stellar performance from operating activities resulting in significant improvement in the segments margins.

• Steady backlog and bookings: In Q1 2021, the backlog represented 195 days of annualized revenue, higher than the previous quarter (189 days) and Q1 2020 (188 days). The net difference in backlog is primarily attributed to the timing associated with the negotiation of long-term contracts. The Bookings under the Eco-Friendly Materials reflected an improvement, which is a key positive as the company seeks higher margins under this segment. 
  

Financial overview of Q1 2021 (In thousands of United States dollars)

Source: Company

• In Q1 2021, the company reported revenue of USD 46.8 million, compared to USD 49.9 million in the previous corresponding period. The revenue got impacted by a less favorable mix of products within Electronic Materials along with global challenges associated with sea freight logistics affecting the supply chain in both segments.
• Operating earnings stood at USD 2.2 million, against USD 3.5 million in Q1 2020. The operating earnings dropped primarily due to lower revenue and higher SGA expenses coupled with higher other expenses.
• Net income in Q1 2021 registered a healthy growth to USD 0.7 million against USD 0.5 million in the previous corresponding period. The rise in net income was mainly due to higher earnings before income tax primarily due to foreign exchange gain of USD 0.85 million.
  

Risks associated with investment

The company is enclosed with many risk factors which may limit its ability to execute its strategy to achieve long‐term growth objectives. Some of the risks are International Trade Regulations, environmental regulations, Competition, Commodity Price, low order booking, Currency fluctuations etc.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The company began FY2021 with a focus on its strategic transformation, supported by a strong balance sheet and healthy performance from its core business. It also cemented its key partnership as it entered into a strategic agreement with Microbion Corporation aimed at expanding its portfolio of active pharmaceutical ingredients along with an acquisition of AZUR which is also well aligned with its plan to utilize external means to expedite growth and gain access to larger markets, which is commendable. On top all the management is focusing on margin expansion and earnings optimization within the Company’s core businesses while launching growth initiatives in the field of engineered semiconductor materials along with health and pharma, is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 2.66 on July 30, 2021. We have considered FutureFuel Corp, HB Fuller Co, Ferro Corp, etc. as the peer group for the comparison.

One-Year Price Chart (as on July 30, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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