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:

• Improved operational efficiencies lead to improved margins: The company has optimized its costs center, which has resulted to a robust profitability margin when compared with its peers. Notably, in Q1FY22, the company reported its EBITDA and operating margin of 43.2% and 38.7%, respectively, higher than the industry median of 12.1% and 2.1%, respectively. Net margin stood at 25.9%, as compared to the negative industry median of 1.5%.
• Strong balance sheet and healthy liquidity profile: The company is virtually debt-free which indicates better financial flexibility. Moreover, the company reported higher cash balance of CAD 5.445 million in Q2FY21, 6% higher than the previous year. Moreover, the company has a line of credit amounting CAD 1 million. The management is confident to meet its operating and capital expenditure needs in the coming quarters.
• New product advancement: In the last twelve months, the company is witnessing increasing traction for its upgraded product focused on energy transition-related modelling. The above upgradation would provide technical capabilities. As the manufacturers are shifting towards on energy transition, the management believes, that the above product might act as a game-changer for the company’s operations.

Q1FY22 Financial Highlights:

• CMG announced its quarterly result, wherein the company reported its top line at CAD 14.414 million, down 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 slide to CAD 5.573 million from CAD 5.711 million in pcp.
• Net and total comprehensive income stood at CAD 3.733 million, up from CAD 3.262 million in pcp, supported by lower finance costs (CAD 0. 844 million v/s CAD 1.405 million in Q1FY21) coupled with lower income tax expenses.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reports its major revenue from 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): EV to EBITDA

Stock Recommendation:

The company reported consistent dividend payment despite sluggish economic scenario, which is a key positive. Notably, the group distributed total dividend of CAD 4.015 million in H1FY21, at par with CAD 4.013 million in pcp. Moreover, the stock carries a dividend yield of more than 4%, which is impressive considering the current interest rate environment. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry median multiple on NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 4.76 on September 17, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 17, 2021). Analysis by Kalkine Group 

CloudMD Software & Services Inc

CloudMD Software & Services Inc (TSXV: DOC) is digitizing the delivery of healthcare by providing patients access to all points of their care from their phone, tablet or desktop computer. The company offers SAAS based health technology solutions to medical clinics across Canada and has developed proprietary technology. 

Key highlights

• Record Q2 2021 revenue: The company clocked record revenue of CAD 15.7 million, an increase of 461% compared to CAD 2.8 million in Q2 2020. The increase was primarily attributable to acquisition growth with 4 acquisitions completed in the quarter, and 14 acquisitions completed in the last twelve months. Excluding the impact of Q2 2021 business acquisitions, the Company achieved a 9% organic growth rate from its existing businesses over Q1 2021.

• Winning through proprietary platform: The company's unique technology has been integrated into its Enterprise Health Solutions Division, which now provides a full-service employer healthcare platform. It has already seen strong adoption rates, cost reductions, and cross-sell synergies throughout its client base, which is a major plus. Furthermore, the company's EHS business has evolved to become its largest and fastest-growing sector, with yearly sales surpassing CAD 70 million and profitable operations, thanks to the purchase of Oncidium. It also has a healthy sales pipeline and is committed to accelerating expansion by winning multi-year contracts with clients across North America.
• Focused on creating innovation:  The company is dedicated to advancing healthcare delivery innovation by leveraging technology to improve access to treatment and enhance health outcomes. Organic expansion, accretive mergers and acquisitions, and asset leveraging are all part of the company's multi-pronged growth strategy. When the firm implements and adopts the Complete Health Platform in the second half of 2021, we expect breakthrough technologies to unlock the company's potential.
  

Financial overview of Q2 2021 (in thousands of Canadian Dollars)

Source: Company

• In Q2 2021, the Company reported healthy revenue of CAD 15.6 million, increased by 461% compared to CAD 2.7 million in the previous corresponding period. The increase was primarily attributable to acquisition growth with 4 acquisitions completed in the quarter, and 14 acquisitions completed in the last twelve months.
• The gross profit increased to CAD 5.5 million in the reported period against CAD 1.0 million in pcp. The increase was primarily attributable to a revenue mix where higher margin revenues from Enterprise Health Solutions and Digital Services made up a stronger overall revenue percentage.
• The Company witnessed an increase by many folds in its total operating expenses, which stood at CAD 11.5 million against CAD 3.4 million in pcp. The rise in expenses was mainly due to higher G&A expenses, higher sales and marketing expenses, share-based compensation, and integration cost.
• On the back of higher operating expenses, the Company’s net loss increased to CAD 5.9 million in Q2 2021, compared to CAD 2.7 million in pcp.
  

Risks associated with investment

The company is exposed to various market risks in the ordinary course of operations that could impact its earnings and cash flows. Some important risk factors are General Healthcare Regulation, Reliance on third-party service providers, Competition, Shortage of Healthcare Professionals, Cybersecurity, etc.

Valuation Methodology Illustrative: EV to Sales

Stock recommendation

Recently, the company delivered another strong quarter that reflects consistent growth across all divisions. Q2 2021 was an impactful quarter for CloudMD as it closed three of the largest acquisitions to date and added CAD 96 million to its annualized revenue run rate that would be fully recognized in Q3 2021, which is a key positive. Additionally, the integration of its health technology solutions into one comprehensive healthcare ecosystem is on track and have achieved impressive early adoption rates which would continue to drive organic growth. Therefore, based on the rationale discussed above and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 1.64 on September 17, 2021. We have considered WELL Health Technologies Corp, Precipio Inc, etc., as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.