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. 

FY20 Financial Highlights: CMG announced its quarterly results, wherein the Company reported revenue of CAD 75.786 million as compared to CAD 74.857 million in the previous corresponding period (pcp). The increase was primarily driven by higher Annuity/maintenance licenses and Professional services income, while lower Perpetual licenses income remained a drag. Operating profit stood higher at CAD 31.751 million against CAD 29.554 million in pcp, thanks to the higher income combined with lower operating expenses. Profit before income and other taxes stood at CAD 32.456 million as compared to CAD 30.890 million in pcp. The increase was aided by higher operating income and inclusion of higher finance income, partially offset by a higher finance cost. The Company reported Net and total comprehensive income of CAD 23.485 million, which improved from CAD 22.135 million in the previous corresponding quarter. The Company ended the quarter with a cash balance of CAD 40.505 million, while total assets stood at CAD 120.866 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to high dependency on oil and gas clients, adverse effect on crude oil demand can hit revenues of the company. Lower demand for crude oil would result in lower drilling activity by the oil manufacturers resulting in lower budget allocation for the software and maintenance purposes.

Valuation Methodology: EV/EBITDA Based relative valuation (Illustrative)

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

Stock Recommendation: The stock of CMG corrected ~41% so far this year amid volatility in the equity market. The group exited the financial year with a positive note in terms of revenue, profitability etc., despite certain headwinds within the software license segment during the fourth quarter of FY20. During the recent quarters, the company witnessed improvement in annuity & maintenance revenue while the performance of the perpetual licensing segment continues to struggle due to lower drilling activities by the oil companies. The company offers innovative services like High-Performance Computing, Flux Boundary, Discrete Fracture Network etc., which are useful to manage exploration activities. We believe the perpetual licensing revenue would likely to improve in coming quarters due to recovery in oil demand in the coming days. Investors should note that the stock has closed above its 20-days and 50-days simple moving average of CAD 4.75 and CAD 4.74, respectively, indicating a bullish trend. We have valued the stock using EV/EBITDA based value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have industry (software & IT services) median on NTM basis. The group has delivered a decent result and took prudent measures to manage cost amid the challenging time. However, the group is serving the oil & gas industry, which is going through a pain owing to lower demand in the past few months. Though the demand recovery is coming, it is still not close to the pre-pandemic level. Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 4.88 on July 28, 2020.

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

Evertz Technologies Ltd

Evertz Technologies Ltd (TSX: ET) is a Canadian provider of telecommunications equipment and technology solutions to the television broadcast and new-media industries. Evertz equipment is used in the production, post-production and transmission of television content. Its solutions are sold to content creators, broadcasters, and service providers looking to support multi-channel digital and high definition television, and next-generation Internet Protocol environments.

FY20 Financial Highlights: Evertz Technologies Ltd. announced its annual results, wherein the Company reported total revenue of CAD 436.592 million as compared to CAD 443.592 million in the previous financial year. The decline was primarily attributable to a delay in the total project work in the fourth quarter on account of COVID 19 pandemic. Gross margin stood at CAD 248.376 million as compared to CAD 253.356 million in pcp due to a dip in revenue, partially offset by lower cost of goods sold. The year witnessed an increase in research & development expense, higher share-based compensation and a slight increase in general expense. Increase in research and development expense was due to a higher staff expense on account of expansion in the cloud-based business. The Company reported net earnings of CAD 69.172 million as compared to CAD 78.504 million in FY19, primarily due to higher finance costs coupled with a lower finance income. Net margin, during the financial year stood at 15.8% as compared 17.7% in the previous financial year.

FY20 Income Statement Highlights (Source: Company Reports)

Risk: An extended lockdown might result in delay or cancellation of projects, which is a key challenge for the Company.

Valuation Methodology: P/E Based (Illustrative)

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

Stock Recommendation: The stock of ET corrected ~30% so far this year due to the ongoing weak investors' sentiment. The Company reported a backlog of more than CAD 94 million and reported shipment of CAD 16 million during the month of May 2020. The Company reported a stable income from the international segment, and we expect the above trend to continue in the coming quarters, which would cushion the income of the Company. The Company has a healthy financial and has ample liquidity to support the working capital in the foreseeable future. Despite a temporary jolt in the recent past due to cancellation of sporting and other live events and various other related projects, the Company is well-positioned to benefit from an economic revival and the industry transition to IP and Cloud-based solutions. We also expect the cloud segment to contribute positively in the near term. We have valued the stock using the P/E based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered the industry average (Technology). Hence, considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 12.52 as on July 28, 2020.

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

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