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.

Key Highlights:

• Win of a new order: Recently, the company reported that its Omni™ Retail platform had been used by Politix, a subsidiary of Woolworths Holdings. With the above software, the client can operate multiple smaller distribution nodes in order to process and fulfil orders faster and more efficiently.
• Industry leading margins: The company reported higher profitability margins from its peers despite a rise in input costs. Operating margin and net margin stood at 3.3% and 0.7%, respectively, higher than the industry median of 2.1% and a negative 3.6%, respectively.
• Solid growth from SaaS segment: In Q1FY22, the company reported strong momentum from its SaaS segments, which has supported the overall top-line growth. Notably, SaaS revenue stood at CAD 5.653 million, grew 47% on y-o-y basis. SaaS backlog increased 14% y-o-y to CAD 65.0 million.

Q1FY22 Financial Highlights:

• TCS announced its quarterly result, wherein the company posted revenue of CAD 33.232 million, up from CAD 28.091 million in the previous corresponding period (pcp). The increase was driven by higher income from professional services coupled with higher income from the SaaS segment.
• Gross profit increased to CAD 14.429 million, from CAD 13.490 million in pcp. The growth was aided by the elevated total revenue, partially offset the higher cost of revenue (CAD 18.803 million v/s CAD 14.601 million in pcp).
• The quarter witnessed an increase in sales and marketing costs, a higher general and administration, and research & development expenses. Total operating expenses jumped to CAD 13.341 million, higher than CAD 11.522 million in pcp.
• Profit from operations stood at CAD 1.088 million, slide from CAD 1.968 million in pcp.
• The company reported its net profit at CAD 0.244 million, slide from CAD 1.235 million in the previous corresponding period.

Source: Company Report

Risks: The company’s operations might be impacted due to price competition due to the arrival of new players in the industry coupled with a change in the preferences of clients, which might lead to a lower demand scenario. Moreover, the company is battling with rising input costs, and the continuation of the above trend would dampen the company’s overall profitability. 

Valuation Methodology (Illustrative): EV to Sales 

Stock Recommendation:

Despite the ongoing slowdown, the company reported impressive growth from its key segments, which indicates higher acceptability of the company’s products and services. Moreover, the company has lowered its long-term debt to CAD 8.1 million in Q1FY22. We have valued the stock using the EV to Sales-based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered the industry (Software & IT Services) median on an NTM basis. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 56.68 on September 15, 2021.

One-Year Technical Price Chart (as on September 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

Sierra Wireless Inc.

Sierra Wireless Inc. (TSX: SW) is a wireless communication equipment designer and provider of Device-To-Cloud Internet-of-Things (IOT) solutions. The company's product and services portfolio contain products such as high-speed cellular modules and services such as connectivity services, cloud platforms, and cellular gateways, among others.

Key Highlights:

• Zero-debt balance sheet: During the last few quarters, the company has successfully reduced its total debt to almost zero, which is a key positive. A lower debt is encouraging as it enhances the overall financial flexibility and reduces finance costs.
• New Order win: Recently, the company collaborated with Airgain® in order to provide connectivity solutions for utility management applications by one of the premier US energy operators. With the collaboration with Airgain®, the company would offer advanced capabilities by combining respective solutions into an end-to-end solution for mobile and fixed connectivity. SW has a healthy track record of providing reliable cellular networking connectivity along with rich visual tools to its end users despite challenging environments.
• Solid business model: Despite the pandemic, the company has successfully increased its recurring income since June 2019, which indicates operational stability. From Q2FY19 till date, the company reported a ~20% CAGR in its recurring-revenue, which is encouraging. The company has constantly offered innovative services which provides value unlocking opportunities to its clients, which illustrates strong recurring revenues. The company would be launching next generation of 5G mobile broadband embedded modules, which would provide secured connectivity at highest possible speeds with low latency with mobile computing, routers, gateways, industrial automation etc.

Q2FY21 Financial Highlights:

• SW announces its quarterly result, wherein the company posted total revenue of USD 132.785 million, climbed from USD 111.718 million in the previous corresponding period (pcp). The increase was driven by strong growth from both IoT Solutions and Enterprise Solutions.
• Gross margin stood at USD 46.231 million, surged from USD 41.008 million in pcp. The growth was primarily driven by higher income, partially offset by a surge in the cost of sale.
• The company reported a slide in total expense at USD 55.559 million, as compared to USD 61.133 million in pcp. The improvement was driven by lower research & development costs, coupled with a slide in administrative expenses.
• Net loss stood lower at USD 9.951 million, as compared to a loss of USD 15.607 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company is battling with net losses due to higher input costs, and continuation of the above trend is likely to dampen the overall performance. The company’s operations might be impacted due to the production interruptions due to COVID-19 cases at a contract manufacturing facility in Vietnam.

Stock Recommendation:

The company reported impressive performance amidst the ongoing economic turbulence. The requirement for the company’s product is likely to remain robust in the coming days, which is a key positive. On the valuation front, the stock is available at an EV to Sales multiples of 0.9x on NTM basis, as compared to the industry (Communication & Networking) mean of 3.4x. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 18.85 on September 15, 2021.

One-Year Technical Price Chart (as on September 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.