Sangoma Technologies
(STC-T) C$18.00
Q2/F22: Solid Execution; M&A is the Key Catalyst Event
We are updating our estimates and target following Sangoma's Q2/F22 results. For our initial take, click here.
Impact: NEUTRAL
Continuing to deliver. We believe management has done a good job over the years of generating solid organic growth while also boosting margins, with Adj. EBITDA margins now sharply higher than where they were just a couple of years ago (almost 20% vs. 11% in F2019). They also have developed a strong track record of meeting or beating guidance (and consensus).
In our view, the strong operational discipline and execution has been complemented by a well-executed M&A strategy that has seen Sangoma become one of the larger players in the industry with the broadest (integrated) suite of communications solutions, its recurring high margin services revenue grew to ~70% of revenue (from 25% in F2018), and it quickly paid down acquisition-related debt from its strong FCF generation.
We believe the solid Q2/F22 results and increased F2022 guidance reflects Sangoma's continued strong operational and M&A execution.
Focusing more on growth than expanding margins. On the conference call, management commented that it is happy with its gross and Adj. EBITDA margin levels, which are among the best in industry. Management indicated a preference to maintain current margin levels and reinvest in more incremental business to drive stronger organic growth. We have adjusted our forecasts to reflect this view.
M&A remains the key near-term catalyst. With Star2Star mostly integrated and its leverage at a comfortable level (~1.6x pro-forma), management is actively working on its next acquisition, with good opportunities in the pipeline. Given the pullback in the share price, management indicated a preference to rely more on debt funding but also a willingness to issue equity if needed (due to the size of the target) for the right strategic acquisition. As a reminder, acquisitions have typically been a major catalyst for the stock.
TD Investment Conclusion
We are lowering our target price to C$27.00 (from C$31.00), which is based on 2.8x (previously 3.5x) our F2023 (was C2022) revenue estimate. The decrease to our target multiple reflects the decline in peer group valuations.