Open Text Corporation

Open Text Corporation (TSX: OTEX) is an Ontario based company which enables organizations to gain insight through market-leading information management solutions, on-premises or in the cloud. The software of the Company allows clients to archive, aggregate, retrieve, and search unstructured information such as documents, e-mail, presentations.

Key updates:

• On August 06, 2020, OTEX entered into an agreement with National Institutes of Health (NIH), wherein the former would enhance its capacity for remote work, process automation and digital transformation through the deployment of OpenText™ Content Suite and OpenText™ AppWorks.
• Recently, the Company informed that the Department of Social Development of South Africa had deployed OpenText™ Documentum™ xCP, a case management framework to digitize its social assistance appeals process.

FY20 Financial Highlights: OTEX declared its annual results, wherein the company reported higher revenue of USD 3,109.736 million as compared to USD 2,868.755 million in the previous corresponding period (pcp). The increase was driven by strong momentum within the cloud services and subscription revenues, while lower income from license and professional service segments remained a drag. Gross profit stood at USD 2,105.961 million, as compared to USD 1,938.052 million in the previous financial year. The quarter was marked by higher research and development expenses, higher selling and marketing expense, a significant surge in the special charges and a higher amortization costs, which was partially offset by a lower depreciation cost. Income from operations stood lower at USD 503.529 million as compared to USD 567.010 million in pcp. Net income, during the quarter, stood at USD 234.368 million, against USD 285.637 million in FY19, primarily due to inclusion of other expense and a surge in interest and other related expense.

FY20 Financial Snapshots (Source: Company Reports)

Risks: A significant portion of the revenue is being derived from the US, and a weakening USD might hamper the income realization.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation: The stock of OTEX has gained ~11% and ~20% in the last nine months and one year, respectively. The Company has reported additions of new clients, new order from the existing clients in the recent past, which augers well for the financial stability. Further, growing adaptability of the cloud-based services augers well for future expansion and improved cash flows. Recently, the Company has enhanced its footprints by collaborating with Google, Amazon and Microsoft and also expanded its Information Management platform into the small and medium business market. Growing digitization among the segment augers well for better revenue growth in the coming days. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Box Inc, j2 Global Inc, etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 61.28 on August 07, 2020.

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

Constellation Software Inc

Constellation Software Inc (TSX: CSU) is a software & computer company, which provides services like developing, installing and customizing of software through acquiring, managing and building VMS (vertical market software) businesses. The Company caters to diversified sectors such as community care, home care, notaries, hospitality, textiles and apparel, auto clubs, tour operators, drink distribution, credit unions and communications.

Recently, the Board of Directors announced a quarterly dividend of USD 1.00 per common share, payable on September 18, 2020.

Q2FY20 Financial Highlights: CSU came up with an impressive set of numbers, wherein the Company reported revenue USD 922 million as compared to USD 846 million in Q2FY19. The increase was underpinned by significantly improvement from the maintenance and other recurring segment coupled with a slight improvement from the professional service segment, partially offset by lower income from hardware & other and license segments. The quarter was marked by higher staff expense, slight increase in third party license, maintenance and professional services costs and depreciation expense, partially offset by a considerable decline in travel, telecommunications, supplies, software and equipment costs. Income before income tax stood higher at USD 131 million as compared to USD 103 million in the previous corresponding period (pcp), supported by a lower foreign exchange loss. Net income was higher at USD 83 million as compared to USD 73 million in Q2FY19. Cash balance at the end of the quarter stood at USD 585 million while total assets were recorded at USD 3,767 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: A further breakout of COVID-19 might result in cancellation by certain customers of their ongoing software maintenance contracts and the suspension or cancellation of new software purchases.  The pandemic may also have an adverse impact on many of the Company’s customers, including their ability to satisfy ongoing payment obligations to the Company, which could increase the Company’s bad debt exposure.

Valuation Methodology: P/CF Based (Illustrative)

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

Stock Recommendation:  The stock stood resilient in the recent past and appreciated ~23% so far this year. The Group entered into a binding agreement with IJssel B.V. to acquire 100% stake of Topicus.com B.V., a Netherlands-based diversified vertical market software provider, which is subjected to close in 2020. We believe the above acquisition would enhance the Company’s presence across new geography and hence augurs well for the overall revenue growth. Investors should note that the stock was trading above its 200-day simple moving average of CAD 1,400.42, indicating a bullish trend. The CSU stock gained ~6% in the last three months, and we expect the momentum to continue, underpinned by growth within the maintenance & other recurring segments. We valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a lower single-digit upside potential (in % terms). For the said purpose, we have considered industry (Software & IT services) median on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 1552.70 on August 07, 2020.

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

Disclaimer

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