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Open Text Corp OTEX


Primary Symbol: T.OTEX

Open Text Corporation is a Canada-based information management company, which provides software and services. Its comprehensive Information Management platform and services provide secure and scalable solutions for global companies, small and medium-sized businesses (SMBs), governments and consumers around the world. It has a complete and integrated portfolio of information management solutions delivered at scale in the OpenText Cloud, enabling organizations master modern work, automate application delivery and modernization, and optimize their digital supply chains by bringing together content cloud, cybersecurity cloud, business network cloud, its operations management cloud, application automation cloud and analytics and artificial intelligence (AI) cloud. Its products include Information Management at scale, AI cloud, Business Network Cloud, Content Cloud, Cybersecurity Cloud, Developer Cloud, DevOps Cloud, Experience Cloud, IT Operation Cloud, Portfolio, and Products A-Z.


TSX:OTEX - Post by User

Post by retiredcfon Oct 26, 2020 8:41am
162 Views
Post# 31780332

RBC Notes

RBC Notes26 October 2020

Canadian Technology: Q3 preview – structural

winners likely to keep winning

Our view: In our preview for companies in our coverage universe that are reporting calendar Q3 results, we believe that structural winners are likely to report solid results, with growth likely to remain elevated against achievable consensus expectations. Overall, the demand environment for technology spending remains resilient, as shown by peer results and the high mix of recurring revenue in our coverage universe. The rally in structural winners like SHOP and KXS has taken a pause in Q3 which, in our view, sets up these stocks for outperformance into the end of the year. Regarding the Canadian software consolidators, we believe these stocks remain defensive and counter-cyclical as they are more likely to deploy capital on acquisitions in periods of economic duress. Cyclicals appear likely to report improved near-term results, though after their strong rallies over the last quarter, the setup for the stocks appears incrementally less attractive. Top Canadian technology ideas remain: SHOPKXSCSU, and ENGH.

Structural winners likely to still keep winning. We believe that the trends that have accelerated demand for structural winners like SHOP and KXS are likely to be sustained in Q3. We believe e-commerce uptake and momentum remains elevated compared to previous trends. The shift to work from home (WFH), video conferencing and new digital initiatives to help better manage supply chains is likely to persist, in our view. The rallies in these stocks have taken a pause in Q3 which, in our view, improves the risk- reward for these stocks this quarter. As a result, we recommend investors maintain overweight positions in SHOP and KXS, given both are exposed to large growth opportunities and are likely to experience sustained/accelerating growth.

Canadian software consolidators expected to see modestly improved organic growth. We expect Canadian software consolidators like GIB.ACSU, and OTEX to see a modest improvement in organic growth in Q3, though organic growth is still likely to remain negative. Headwinds from reduced discretionary enterprise spending, travel restrictions and social distancing are expected to moderate this quarter, which would help organic growth for these companies. While improved organic growth would help lift sentiment, these companies have created the vast majority of shareholder value through acquisitions, not organic growth. We see the Canadian software consolidators as counter-cyclical, in that they are more likely to deploy higher amounts of capital on acquisitions during periods of financial and economic duress. For example, CSU appears to have deployed more capital on acquisitions during Q3 compared to Q1 and Q2. While GIB.A and OTEX have not deployed capital on acquisitions amidst COVID-19, their resilient cashflow is reducing leverage, which sets them both up for potential acquisitions in the future, particularly if the financial environment deteriorates. As a result, we view the Canadian software consolidators as core holdings in the Canadian technology sector.

Cyclicals face a higher bar. Unlike last quarter, where cyclicals saw the greatest outperformance as headwinds were more than sufficiently reflected in overly conservative consensus expectations and depressed share prices, the risk-reward for the cyclicals in our coverage is less attractive, in our view. While we believe that there is potential upside to consensus expectations for the cyclicals in our coverage universe, valuations for these companies have normalized compared to previously depressed levels.

 

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