Canadian IT solutions provider Softchoice (Softchoice Stock Quote, Charts, News, Analysts, Financials TSX:SFTC) received a coverage initiation from BMO Nesbitt Burns on Wednesday, with analyst Deepak Kaushal starting the stock off with an “Outperform” rating, saying he expects double-digit EBITDA growth from the company up ahead.
Toronto-based Softchoice, a software-focused IT solutions provider with cloud migration, services and hardware offerings, has seen its share price drop over the past year, going from just under C$23 per share at the start of last December to now in the C$15-$16 range.
But Kaushal sees upside from here and has issued a 12-month target price of C$20.00, which at the time of publication of his report represented a projected return of 47 per cent.
“We believe the company’s core strength is derived from 30 years of providing customers with top tier expertise in leading software technologies, combined with an institutionalized culture of delivering customer value and driving sales growth which has built a strong reputation and customer base in the IT services market,” said Kaushal in his report as published by the Globe and Mail.
Kaushal said there are likely to be some headwinds for Softchoice over the near term but a recent pullback — SFTC is down about 20 per cent since early October — makes for a good entry point for long-term investors.
“As an investment, Softchoice offers diversified exposure to the latest trends in enterprise software, with a capital-light model that offers long-term profit, cash flow and dividend growth, commensurate with growing digital transformation across the broader economy,” he said.
“We expect resilient demand for cloud computing solutions, particularly in the commercial/mid-market and believe continued operational efficiency improvements can sustain double-digit EBITDA growth. Notably, we expect even higher free cash flow growth as one-time investments end, which we expect to boost market value,” Kaushal wrote.
Softchoice reiterated its full 2022 guidance in its third quarter commentary, saying the company should pull in gross profit above $320 million and adjusted EBITDA as a percentage of gross profit of between 25 and 28 per cent. (All figures in US dollars except where noted otherwise.)
For the third quarter, SFTC hit net sales of $222.1 million, up 11.6 per cent year-over-year, and adjusted EBITDA of $15.3 million, up 35.5 per cent.
“We recorded a strong third quarter of organic growth driven by continued demand for our Software & Cloud IT solutions in our public cloud, security and workplace portfolios,” said President and CEO Vince De Palma in a November 10 press release.
“Our growth investments continued to drive deeper customer engagements, resulting in record revenue retention and gross profit per customer as well as growth in our total number of customers,” De Palma said.