Enghouse Systems Limited

Gaining from Acquisitions: Enghouse Systems Limited (TSX: ENGH) is one of Canada’s a leading software and services company. The company provides enterprise oriented software solutions to a variety of markets. The company’s business is bifurcated in two segments including the Interactive Management Group and the Asset Management Group. The Interactive Management Group has expertise in the customer interaction software and services and serves banks, health care, technology, and hospitality companies. Meanwhile, its Asset Management Group provides software and services to media, defence, telecommunications, and utility companies.

Must Know Updates:

• On April 24, Enghouse Systems renewed its normal course issuer bid program to buy-back its common shares.

• On March 31, Enghouse Systems announced that it is participating in the Microsoft Teams certification program. Moreover, it now offers cloud and on-premise contact center options for Microsoft Teams.

• On March 20, the company announced that its Vidyo unit has developed a program that will help health systems to scale the telemedicine. Notably, coronavirus spread has led to an exponential growth in the video communication platforms. The company’s Vidyo Telehealth solution facilitates heath systems like clinics and hospitals to protect front-line staffs by ensuring remote diagnoses and treatments.

• On March 5, Enghouse Systems posted stellar financial performance for the first quarter. The company’s sales zoomed 28.6% y-o-y to CAD $110.66 million, thanks to the incremental sales from recently acquired businesses. Results from operating activities operating activities showed 20% increase to CAD 30.84 million. Adjusted EBITDA came in at CAD 35.33 million, up about 34% y-o-y, thanks to the higher sales. At the end of the quarter, ENGH had cash and short-term investments of CAD 116.3 million.

Financial Highlights (Source: Company Reports)

• On January 2, the company announced the acquisition of Dialogic Group for CAD 52 million. The acquisition of Dialogic Group is likely to fortify Enghouse Systems’ competitive positioning in the enterprise video and unified communications market.

Valuation Methodology: Price/Cash Flow Approach

Price/Cash Flow Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock recommendation: Enghouse Systems Limited’s business has been steady amid the COVID-19 outbreak. The company continues to benefit from sustained demand, expanded global footprint, new product offerings, and acquisitions. Besides strength in its base business, Enghouse Systems is benefitting from acquisitions which extend its product suite to growth markets like video collaboration, IPTV solutions, and e-ticketing. Further, the company remains well positioned to acquire businesses that are accretive to its business and will drive revenue, and also expand its product suite and geographic reach.  Also, the company’s recent renewal of normal course issuer bid program signifies management’s confidence in the business. Investors should note that companies through NCIB buy shares from the market, particularly when they find it to be attractive. Enghouse Systems Limited’s NCIB renewal implies that the company has significant cash and strong liquidity. We have valued the stock using Price/ Cash Flow based relative valuation and consider Kinaxis Inc. (TSX: KXS), Descartes Systems Group Inc (TSX: DSG) and Altus Group (TSX: AIF) as peer group and arrived at a target price which implies a potential upside in low double digit (percentage terms). Hence, we recommend a ‘Buy’ on Enghouse Systems Limited stock at the closing price of CAD 51.34 on April 27.

ENGH One-Year Daily Price Chart (Source: Thomson Reuters)

Absolute Software Corporation

Absolute Software Corporation (TSX: ABT) offers cloud-based endpoint visibility and control platform for the management and security of computing devices, applications and data against theft or attack. The company serves nearly 12,000 commercial customers across the globe.

Absolute Software Corporation is scheduled to announce its third quarter fiscal 2020 result on May 11.

Q2FY2020 financial highlights: Absolute Software Corporation posted total revenues of US$ 25.8 million in the second quarter, implying a y-o-y growth of 6%. The y-o-y increase in revenues reflects strong momentum in the commercial recurring revenues. The Annual Contract Value Base or ACV Base stood at US$ 100.3 million, reflecting an increase of 5% y-o-y and 1% on a sequential basis. The Enterprise & Government portions of the ACV Base increased 12% y-o-y and 4% sequentially. Notably, the Enterprise & Government (or E&G) sector customers now represent about 69% of the ACV Base. The Education sector customers representing 31% of the ACV base witnessed a decline of 8% y-o-y and 4% sequentially. Incremental ACV from new customers stood at US$ 1.3 million, higher than the prior year. Investors should note that the net ACV retention from existing customers was 100%, which is encouraging.  Adjusted EBITDA (pre IFRS) came in at US$ 5.7 million, up 28%. Meanwhile, adjusted EBITDA (pre IFRS) was increased 400 basis points to 22%. The company posted net income of US$ 2.7 million, up 54% y-o-y. Cash from operating activities came in at US$ 2.2 million. The company made dividend payments of CAD 0.08 per share.

Q2FY2020 Financial Highlights (Source: Company Reports)

Stock Recommendation: The ABT stock has been resilient to recent stock market crash and is up about 18% on a year-to-date basis. Investors should note that the company’s majority of revenues are recurring in nature and are growing at a healthy pace. Meanwhile, its adjusted EBITDA is also increasing at a breakneck pace. Notably, ABT’s adjusted EBITDA more than doubled in FY19. The company’s ACV base growth is witnessing softness in the Education sector, but the Enterprise & Government sector ACV remains solid. Notably, the company’s total ACV base has increased consistently over the past three consecutive quarters, which is impressive. The ACV base signifies the annualized value of recurring revenues that the company has under contract with its commercial customers at a point. This simply means, it is an indicator of the company’s future recurring revenues. The steady increase in ACV implies that ABT is likely to generate consistent recurring revenues in the coming quarters. Further, ABT has very few direct competitors, which is a significant tailwind. Also, ABT has a strong financial position with no debt. ABT stock is trading at a lower Price/Cash Flow valuation metric when compared to the industry average, which implies further upside in the stock. Given the company’s strong business, steady recurring revenues and comfortable valuation, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 10.25 on April 27. 

ABT One-Year Daily Price Chart (Source: Thomson Reuters)

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.