Evertz Technologies Limited

Evertz Technologies Limited (TSX: ET) provides software, equipment, and technology assistance and produces, markets video & audio infrastructure solutions for the television, telecommunications, and media segments. The Company declared a quarterly dividend of CAD 0.21 per share, payable on July 17, 2020.

FY20 Financial Highlights: For the period ended April 30, 2020, ET posted a stable set of yearly numbers. Total revenue, during the period, stood at CAD 436.6 million, as compared to CAD 443.6 million in the previous financial year. The decline was primarily attributable to a reduction in total project work during the fourth quarter on account of COVID 19 pandemic. Gross margin stood at CAD 248.78 million, as compared to CAD 253.36 million in pcp, due to a lower top line. The year was marked by an increase in research & development expense, higher share-based compensation and slight increase in general expense, offset by an increase in foreign exchange gain. Increase in research and development expense was primarily attributable to higher headcount due to growth in the cloud-based business. Net earnings, during FY20, stood at CAD 69.17 million, as compared to CAD 78.50 million in FY19, primarily due to higher finance costs coupled with a lower finance income.

FY20 Financial Highlights (Source: Company Reports)

Risk: A prolonged lockdown or any extension of current restriction measures might result in delay or cancellation of projects, which is a key challenge for the Company.

Valuation Methodology: EV to Sales Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of ET tumbled ~33% so far this year due to a correction in the global equity market on account of weak market sentiment due to COVID 19 pandemic. The Company has enough liquidity to cater to its near-term working capital requirements during the ongoing economic cycle. 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. The stock carries an attractive dividend yield of ~5.98% on an annualized basis, amidst the current interest rate scenario. We have valued the stock using EV/Sales based relative valuation approach and considered industry (Technology) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 12.04 as on July 2, 2020.

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

CGI Inc.

CGI Inc. (TSX: GIB.A) is an independent IT and business consulting firm which delivers an end-to-end portfolio of capabilities. The Group offers strategic IT and business consulting, business process services and intellectual property solutions.

 The Group announced that it had received a renewal of digitization services to LocalTapiola, one of Finland's largest insurance companies, amounting to CAD 74.5 million. The above service will focus on to upgrade digital platform used for providing insurance against loss or damage. As part of the new agreement, CGI will implement new delivery models to ensure optimal productivity and cost control.

Q2FY20 Financial Highlights:  CGI Inc. announced its quarterly results wherein the company’s reported revenue stood at CAD 3,131.14 million, reflecting growth of ~2% over the previous corresponding period. The growth was driven by an improved performance from the management of IT and business functions, while a lower income from systems integration and consulting income remained a drag. Total operating expenses stood at CAD 2,706.06 million higher than CAD 2,641.47 million in the previous corresponding period, due to a considerable increase in the acquisition-related and integration costs and net finance costs followed by a slight increase in costs of services. Adjusted EBIT stood higher at CAD 483.2 million against CAD 454.1 million, while margin improved to 15.4% versus 14.8% in pcp. Net earnings, during the period, stood at CAD 314.84 million as compared to CAD 318.28 million in pcp. At the end of the quarter, Cash and cash equivalents and total assets stood at CAD 302.48 million and CAD 14,597.24 million, respectively. The Company reported a stable backlog of CAD 22,994 million, at par with CAD 22,947 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The Company provides technology and IT services to several business and corporates. A prolonged lockdown scenario may impact the backlog and order-book of the group.

Valuation Methodology: P/CF Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock corrected ~20% so far this year, due to weak investor’s sentiment coupled with extended lockdown phase across the several economies on account of COVID 19 pandemic. The company receive a renewal of a contract from an esteemed client, which indicates higher customer-satisfaction. The company has deep-expertise across several IT-based services and offers several value-added new-generation services, which is essential for new aged businesses in order to stay competitive in the industry. The company has an outstanding track record of on-time, within-budget delivery aided from the commitment to excellence philosophy and its robust governance model. The group has a stable backlog which provides revenue visibility. The company’s book to bill ratio stood at 88.9%, which is decent. U.S federal government is one of the key customers of the group and contributed ~13% to the group’s revenue, which is a key positive from a stable revenue point of view. We have valued the stock using P/CF-based relative valuation approach and considered industry (Technology) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the current price of CAD 86.43 as on July 2, 2020.

GIB.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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