Tecsys Inc

Tecsys Inc (TSX: TCS) is engaged in the development and sale of enterprise supply chain management software for distribution, warehousing, transportation logistics, point-of-use and order management. It also provides related consulting, education and support services. 

Key Highlights:

• Elevated Annual Recurring Revenue: The company reported a consistent growth in the annual recurring revenue (ARR), driven by organic growth from its ongoing customers, which is a key positive. The increase suggests business stability which would support the company’s profitability and cash flows.

               Source: Company Presentation

• Strong Financial Metrics: The company reported exponential growth in its profitability and bookings in the recent past, aided by strong demand dynamics. The company’s net profitability for 6MFY21 grew to CAD 3.3 million, from CAD 1.1 million, a year ago, driven by higher SaaS subscription bookings. We expect the same trend to continue in the foreseeable future driven by the company’s focus to strengthen its portfolio with a strong retail capability to expand the addressable market and to enhance its footprints across Europe.

          Recent Growth Trend (Source: Company Presentation)

Q2FY21 Financial Highlights:

• TCS announced its quarterly results, wherein the company posted total revenue of CAD 30.694 million, higher than CAD 26.008 million in the previous corresponding period (pcp). The increase was driven by tremendous growth across the cloud, maintenance and subscription segment (CAD 13.432 million versus CAD 10.063 million in pcp) and increase revenue from professional services.
• Gross profit stood at CAD 16.010 million, higher than CAD 13.055 million in pcp, supported by higher income, partially offset by higher cost of revenue due to higher services costs and higher product costs.
• Total operating expense stood higher at CAD 12.558 million, as compared to CAD 10.839 million in Q2FY20, due to an increase in sales and marketing, higher general and administrative costs and higher research and development expense.
• Net profit stood at CAD 2.086 million, versus CAD 1.404 million in pcp. Net finance costs declined drastically to CAD 0.131 million, as compared to CAD 0.283 million in pcp, which further supported the bottom-line.

Q2FY21 Financial Snapshots (Source: Company Reports)

Risks: The company’s recent growth was supported by improved traction within the cloud segment, due to transition of business processes to online, easy-to-use data- storage model. However, the company might witness a price competition from new-entrants, which might take a toll on the company’s margin.

Valuation Methodology (Illustrative): EV to Sales

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

Stock Recommendation:

The stock of TCS soared ~137% and ~116% in the last one year and nine-months, driven by strong traction across the company’s SAAS and cloud-based offerings. Total gross margin improved to 50% for the first half of fiscal FY21, as compared to 49% for the first half of FY20, which is impressive as it suggests a stable pricing-power. The stock has closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish pattern. We expect the momentum to continue in the foreseeable future, aided by the company’s focus on enhancing its footprints coupled with product innovations. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of double-digit upside (in percentage terms). For the said purposes, we have considered peers like mdf Commerce Inc, Kinaxis Inc, Descartes Systems Group Incetc. Hence, considering the aforesaid facts, we give a ‘Hold’ recommendation on the stock at the current closing price of CAD 41.27 on December 3, 2020.

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

Descartes Systems Group Inc.

Descartes Systems Group Inc. (TSX: DSG), is a technology company focused on logistics and supply chain management business processes. Its solutions are cloud-based and are focused on the productivity, performance, and security of logistics-intensive businesses. 

Key highlights 

• Restructuring Plan:Due to economic uncertainty caused by COVID-19, the company undertook a restructuring plan to reduce its cost to strengthen the financial position. Under this, the company is reducing the workforce by approximately 5% and closed many office facilities where work from home became a viable option. This restructuring process costs USD 2 million and is expected to complete during the fourth quarter of fiscal 2021. The company expects an annualized cost savings of approximately USD 6 million to USD 7 million from this.  

• Healthy cash position: As on October 31, 2020, the company had USD 114.4 million in Cash, increased by USD 70 million as against USD 44.4 million on January 31, 2020, supported by the Cash provided by operating activities of USD 33.1 million, up 20% from USD 27.5 million in Q3 2020. 

• Zero debt in the books: There is no debt in the books of the company, this show how sound the company is on financial ground. 

Financial overview of Q3 2021 (In millions of USD, other than per share amounts)

Source: Company

• In Q3 2021, the company posted total revenues of USD 87.5 million, increased by 5.4%, as against USD 83.0 million in the previous corresponding period. The increase was primarily due to acquisitions made by the company, which contributed an incremental revenue of USD 2.2 million, along with growth in transaction and subscription revenues from new and existing customers.
• Income from operations in the reported quarter stood at USD 18.8 million as against USD 13.7 million in Q3 2020, primarily due to high revenues and low cost of revenues.
• The company posted net income of USD 13.3 million, increased by 37% in Q3 2021, against USD 9.7 million in the previous corresponding period.

Geographical bifurcation of revenues (In USD million)

Source: Company

Risk associated in investment

The company is exposed to various risks such as system or network failures, information security breaches or other cybersecurity threats in connection with the services and products. These risks could reduce the revenues and increase costs or result in liability claims that can seriously harm the business.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company is debt-free, that means there is no pressure of any interest cost which could escalate the operating expenses. Further, the company is targeting cost savings by implementing a restructuring plan. The recent acquisitions made by the company have also started paying off in term of revenues and going forward, these will improve the financial position of the group. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 77.27 on December 3, 2020. We have considered Manhattan Associates Inc, Enghouse Systems Ltd, Tecsys Inc etc. as the peer group for the comparison. 

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.