Enghouse Systems Limited

Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The company's operations are organized into two segments, namely the Interactive Management Group and the Asset Management Group. 

Key Highlights:

• Higher recurring revenue indicates income stability: In Q1FY21, the group reported its recurring revenue at 60.7% of the total income which is higher than the recurring revenue of 58.2% in FY20. A higher recurring revenue as a percentage of total sales indicates improved revenue stability due to an increase in the repetitive business.
• Improved Financial Metrics: In recent years, the group reported constant growth in total revenue, adjusted EBITDA per share, growth in dividend per share. Moreover, hosted & maintenance revenue also remained elevated, which has supported the company’s overall performance.

Source: Company Presentation

• Significant Surge in Cash Balance: At the end of Q1FY21, the group reported its cash and cash equivalent of CAD 225.977 million, as compared to CAD 111.451 million in pcp, which reflects a strong operational performance amidst the current economic slowdown.

Q1FY21 Financial Highlights:

• ENGH declared its first-quarter result, wherein the company reported revenue of CAD 119.100 million, higher from CAD 110.656 million in the previous corresponding period (pcp). The increase was driven by strong momentum in hosted and maintenance revenue coupled with an increased income from Professional services.
• Result from operating activities stood at CAD 40.699 million compared to CAD 30.843 million in pcp. The increase was supported by increased revenue and a slight decreased in operating expenses (CAD 46.893 million v/s CAD 47.336 million in pcp).
• Income before income taxes stood at CAD 26.161 million vs CAD 20.767 million in pcp, reflecting 26% y-o-y growth. The quarter was marked by higher foreign exchange losses (CAD 3.110 million v/s a gain of CAD 0.347 million in pcp) coupled with a higher amortization of acquired software and customer relationships costs (CAD 10.774 million v/s CAD 10.080 million in pcp).
• Net Income for the period stood at CAD 20.642 million, higher than CAD 16.136 million in Q1FY20, reflecting a 27.9% y-o-y growth.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  In order to remain afloat within the industry, the products required constant innovation due to the constant evolution. Thus, the arrival of any new players with strong offerings and at a significantly lower price point would lead to fierce price competition, which might impact the company’s margins and client base.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

Enghouse continues to strategize on building a consistently profitable enterprise software company with a diversified product portfolio. The company has ample presence across North America and as well as in the global market. The company has successfully controlled its direct expenses, and hence Adjusted EBITDA margin stood at 37.4% in Q1FY21, significantly higher than 31.9% in Q1FY20, which is encouraging. Moreover, the company formulated work from home strategy, which has supported the company cost structures and is a key positive. 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 considered peers like Altus Group Ltd, CGI Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ENGH at the last closing price of CAD 53.20 on May 31, 2021.

One-Year Price Chart (as on May 31, 2021). Analysis by Kalkine Group

Maxar Technologies Inc.

Maxar Technologies Inc. (TSX: MAXR) is an innovator in Earth Intelligence and Space Infrastructure, which delivers disruptive value to government and commercial customers to help them to monitor, understand and navigate the changing planet; deliver global broadband communications, and explore and advance the use of space.

Key Highlights:

• Lower Net Debt led to improved Financial Flexibility: The company’s net debt has witnessed a constant decline in the last few quarters, which a healthy sign. Net debt stood at USD 2,189 million, lower than CAD 3,040 million in the previous corresponding period (pcp) Notably, the company’s Leverage ratio stood at ~3.8x, which is well below covenant ceiling of 7.50x.                                       

Source: Company Presentation

• The Management’s Bullish stance: In the recent past, the group reported solid growth from the earth Intelligence and Space Infrastructure segment, supported by several renewals of commercial and international government customers coupled with new orders from the US Army and National Geospatial Intelligence Agency related support training, tactical, and intelligence missions. These orders are evergreen projects for the company and are hardly related to the current general and economic scenario. Notably, the above segment derives the major chunk of the income.
• Management Update: Recently, the group announced the appointment of Daniel Nord as Senior Vice President, Chief Product Officer, effective May 24.

Q1FY21 Financial Highlights:

• MAXR announced its quarterly result, wherein the company posted total revenue of USD 392 million compared to USD 381 million in the previous corresponding period (pcp). The marginal growth was driven by higher income from the space infrastructure segment (USD 155 million v/s USD 132 million in pcp).
• Adjusted EBITDA stood at USD 67 million, lower than USD 77 million in pcp. The decline was primarily due to lower Adjusted EBITDA from the Earth Intelligence segment on account of a USD 30 million slide in deferred revenue recognized from the Enhanced View Contract.
• The quarter was marked by higher SG&A expense (USD 84 million v/s USD 68 million in pcp), while depreciation and amortization stood lower at USD 74 million from USD 90 million in pcp.
• Net loss widened to USD 84 million, from a net loss of USD 48 million in pcp. The corporation reported a higher interest expense of USD 78 million, as compared to USD 49 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s business with various government entities is exposed to the risk associated with policies, priorities, regulations, mandate and funding levels. Furthermore, it requires innovative technologies to meet the needs of existing or potential new customers. It also faces competition that may cause either to reduce prices for imagery, related products and services or to lose market share.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

For FY21 the company expects its total revenue within the range of USD 1,760 million to USD 1,840 million. Total adjusted EBITDA is expected to be in the range of USD 420 million to USD 470 million, while operating cash flow is expected in between USD 260 million to USD 290 million. The group has prudent capital management and do not have a debt maturity before December 2023, which ensures the stable liquidity. We have valued the stock using Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Lockheed Martin Corp, General Dynamics Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of MAXR at the last closing price of CAD 37.57 on May 31, 2021.

One-Year Technical Price Chart (as on May 31, 2021). Analysis by Kalkine Group

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

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