BlackBerry Limited

BlackBerry Limited (TSX: BB) provides intelligent security software and services to enterprises and governments around the world. the Company leverages artificial intelligence and machine learning to deliver innovative solutions in the areas of 29 cybersecurity, safety and data privacy, and is a leader in the areas of endpoint security, endpoint management, encryption, and embedded systems.

Key Updates:

• Increased traction from IOT segment: The company reported improved performance from its Internet of things (IOT) segment supported by the partial recovery of the automotive market from the slowdown related to the COVID-19 pandemic. Notably, in H1FY21, the company reported a revenue of USD 83 million, higher than USD 60 million in pcp. We expect the trend to continue in the coming quarters supported by a revival within the segment.

• Collaboration with Okta: On November 02, 2021, the company declared its collaboration with Okta Inc., a leading provider of identity management, wherein it would enable its clients to make the authentication experience frictionless, optimize workforce productivity and with optimum security posture. The above is likely to provide seamless experience to its users, which would subsequently help to enhance the productivity of the client.

• Positive trends from the Automotive Secular segment: In the recent past, the automobile industry is witnessing sea change due to the implementation of Digitization, Electrification and significant implementation or the safety-critical systems such as ADAS, Digital cockpits and Gateways. The group provides solutions related to the cybersecurity services which are required for the above segment. Hence, the upcoming prospects seems immense considering the changing demand dynamics of the sector. We believe the company is highly poised to take advantage coming from the above segment.

Q2FY22 Financial Highlights:

• BB announces its quarterly result, wherein the company posted its revenue of USD 175 million, slide from USD 259 million in pcp. The decrease in the topline was primarily due to lower revenue from the Licensing and Other segment (USD 15 million v/s USD 108 million in pcp) due to a decrease in revenue from the Company’s intellectual property licensing arrangements including its patent licensing agreement with Teletry.
• The group reported its gross margin at USD 112 million, as compared to USD 199 million in pcp. The decline was primarily due to a lower topline coupled with marginal slide in cost of sales.
• The quarter was marked by higher operating expenses of USD 253 million, as compared to USD 221 million in pcp, primarily due to higher cost related to debentures fair value adjustment and higher selling, marketing and administration costs. Operating loss widens to USD 141 million, from USD 22 million in pcp.
• The group reported a higher net loss of USD 144 million, as compared to a net loss of USD 23 million in pcp.

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks: Due to the sluggish performance from the Licensing and Other segment, the company witnessed a slide in its overall performance, and continuation of the above trend is likely to dampen the company’s margins and profitability. 

Valuation Methodology (Illustrative): EV to Sales Based

Stock Recommendation:

At the end of Q2FY22, the company reported a cash balance of USD 291 million, higher than USD 214 million in Q4FY21. The increase in cash balance is a key positive as it enhances the liquidity level. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Software & IT services) mean on an NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of BB at the last traded price of CAD 14.55 on November 03, 2021. 

Technical Analysis Summary

One-Year Technical Price Chart (as on November 03, 2021). Source: Kalkine, Analysis by Kalkine Group 

Computer Modelling Group Ltd.

Computer Modelling Group Ltd (TSX: CMG) is a Canada-based provider of reservoir simulation software for the oil and gas industry. Its capabilities include integrated analysis and optimization, black oil and unconventional simulation, reservoir and production system modelling, post-processor visualization, compositional simulation, thermal processes simulation, and fluid property characterization.

Key Highlights:

• Industry beating margin: The company commands strong profitability margins, when compared to its peers. Notably, in Q1FY22, the company reported EBITDA and operating margin of 43.2% and 38.7%, respectively, higher than the industry median of 11.5% and 1.6%, respectively. Moreover, the company’s net margin was recorded at 25.9% in Q1FY22, as compared to the negative industry median of 2.2%. An improved margin indicates higher operational efficiencies.

• Impressive dividend yield: The company reported consistent dividend payment despite sluggish economic scenario, which is a key positive. Moreover, the group distributed total dividend of CAD 4.015 million in Q1FY21, at par with CAD 4.013 million in pcp. Notably, the stock of CMG carries a dividend yield of ~3.731% on an annualized basis, which is looks attractive considering the persisting interest rates.

• Improved working capital management: At the end of Q1FY22, the company reported a current ratio of 2.20x, which is better than the industry median of 2.03x. An improved ratio suggests prudent working capital management, which is a key positive.
  

Q1FY22 Financial Highlights:

• CMG announced its first quarter result, wherein the company posted its top line at CAD 14.414 million, lower from CAD 16.672 million in the previous corresponding period (pcp). The decline was primarily due a decline software license revenue from all the geographic regions except South Africa.
• The company witnessed improved cost structure and posted a decline in operating expenses (CAD 8.841 million v/s CAD 10.961 million in pcp). The above was primarily attributed to lower Sales, marketing and professional services costs, slide in Research and development expense and lower General and administrative expense. Operating profit stood at CAD 5.573 million, slide from CAD 5.711 million in pcp.
• Net and total comprehensive income stood at CAD 3.733 million, stood marginally higher from CAD 3.262 million in pcp, supported by lower finance costs (CAD 0.844 million v/s CAD 1.405 million in Q1FY21) and a slide in the income tax expenses.

Q1FY22 Income Statement Highlights (Source: Company Report)

Risks: The company reports its major revenue from the Annuity/maintenance licenses fees, which primarily dependent on the oil and gas industry. Hence, due to a lower capital allocation by the oil and gas manufacturers the company reported a slide in software license revenue across the geographic regions. Continuation of the above trend is likely to dampen the company’s overall operations. 

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

At the end of Q1FY21, the company reported a higher cash balance of CAD 54.445 million, which is higher than CAD 49.068 million in previous quarter. A higher cash balance is a healthy sign as it enhances the overall liquidity position of the company. Additionally, the company also has CAD 1.0 million under a line of credit. The management believes that the above is sufficient to cater to the company’s working capital and CAPEX requirements. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have peers like Secure Energy Services Inc, Pulse Seismic Inc and Solaris Oilfield Infrastructure Inc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last traded price of CAD 5.36 on November 03, 2021.

Technical Analysis Summary

One-Year Technical Price Chart (as on November 03, 2021). Analysis by Kalkine Group

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

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