Enghouse Systems Limited

Stable Balance Sheet and Significant Increase in Revenue: Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. As on 9 June 2020, the market capitalization of the company stood at ~CAD3.57 billion.

Quarterly Performance (For the Period Ended 30 April 2020): During the second quarter ended 30 April 2020, revenue of the company went up by 58% to CAD140.9 million and adjusted EBITDA witnessed an increase of 81.3% to CAD49.3 million. This resulted in an increase of 63.8% in net income to CAD27.1 million. In the same time span, results from operating activities increased by 73.8% to CAD46.3 million and cash flows from operating activities excluding changes in working capital increased by 72.5% to CAD50.0 million. During the quarter, ENGH reported a financially stable with no long-term debt other than a nominal amount that is non-interest bearing. While the global pandemic continues to have a significant impact on the economy, ENGH witnessed an overall positive financial impact on its sales of solutions. The decent financial performance of the company enabled the Board to declare a quarterly dividend of CAD0.135 per common share, which is to be paid on 31 August 2020.

Quarterly Financial Highlights (Source: Company Reports)

Impact of COVID-19: The company has not been impacted from the outbreak of COVID-19 and has had an overall positive financial impact on its sales. The sales of the company’s remote conferencing and telehealth/financial services video platform - Vidyo were strong due to the remote working conditions. However, sales of hardware, professional services and certain business units were softened because of delays in procurement, deferral in on-site installations and customers postponing upgrades and implementations.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company experienced growth from both internal sources and from the acquisitions of Vidyo and Espial. The rapid shift towards remote working is likely to benefit the company with additional opportunities in the coming period. The stock of ENGH gave a return of 34.59% in the last three months and a return of 15.47% in the past one month. We have valued the stock using EV/Sales multiple based illustrative relative valuation approach and have arrived at a target price offering an upside of higher single-digit (in percentage terms). The stock is trading close to its 52-weeks’ high level of CAD77.0, but still holds the potential for growth as depicted by the EV/Sales valuation methodology. Considering the decent returns in the past three months, current trading levels, positive impact of COVID-19 on the business activities and increasing opportunities, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD65.0, up by 2.8255% on 9 June 2020.

ENGH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Open Text Corporation

Recognized as Overall Leader in Aspire Customer Communications Management: Open Text Corporation (TSX: OTEX) is a technology business which allows clients to archive, aggregate, retrieve, and search unstructured information. As on 9 June 2020, the market capitalization of the company stood at ~CAD15.72 billion. The company has recently been recognized as an Overall Leader in the 2020 Aspire Customer Communications Management Leaderboard™ for the third consecutive year. According to Aspire, OpenText is a good fit for enterprises who want to buy from a large enterprise IT provider.

Waikato Regional Council Embraces Secure Digital Collaboration with OpenText: The company has recently announced that the manager of the region's natural resources, Waikato Regional Council has implemented OpenText™ Content Suite and OpenText™ Core Share, which will provide secure collaboration and mobility. Waikato Regional Council stated that OTEX has improved functionality and provides a better experience and more options to its users.

Quarterly Performance (For the Period Ended 30 April 2020): During the third quarter ended 30 April 2020, the company reported record Operating Cash Flows of USD329.6 million, reflecting a YoY increase of 15.2%. In the same time span, OTEX reported a YoY increase of 14.1% in revenues to USD820.4 million and delivered an adjusted EBITDA of USD259.5 million. The company ended the quarter with a strong balance sheet with cash balance of USD1.45 billion and a consolidated net leverage ratio of 2.3x. These results reflect the strength and adaptive nature of the company. The Board declared a cash dividend of USD0.1746 per common share, which is to be paid on 19 June 2020.

Quarterly Financial Highlights (Source: Company Reports)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has undertaken a restructuring plan and has opted for a hybrid return to workplace strategy in order to refrain itself from the losses of COVID-19 crisis. The stock of OTEX gave a return of 4.18% in the past three months and a return of 5.41% in the last one month. We have valued the stock using EV/Sales multiple based illustrative relative valuation approach and have arrived at a target price of single-digit upside (in percentage terms). For the said purposes, we have considered Pegasystems Inc, j2 Global Inc, etc. as peers. The stock is inclined towards its 52-weeks’ high level of CAD63.44, but still holds the potential for growth. Considering the current trading levels, decent returns in the past one month, resilient financial uptake and collaboration with Waikato Regional Council, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD57.90, down by 0.3271% on 9 June 2020.

OTEX Daily Technical Chart (Source: Refinitiv, 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.