Enghouse Systems Ltd T.ENGH

RBC

[retiredcf]

Their upside scenario target is $105.00. GLTA

March 8, 2021

Enghouse Systems Limited Waiting for reopening

Our view: We think Enghouse’s shares are likely to remain range-bound pending reopening. The stock appears to be pricing in a continued slow pace of acquisitions given COVID-related travel restrictions. Elimination of travel restrictions is likely to be a catalyst for M&A and the stock. For Q1, we expect headline results essentially in line with consensus. We maintain our Outperform rating and $80 price target.

Key points:

• Q1 headlines likely to match consensus. Enghouse will report Q1/ FY21 (Jan-qtr) results on March 11, after market close. Our forecast calls for Q1 revenue to rise 9% Y/Y to $121MM. Notably, our estimate does not include the Altitude Software acquisition, which closed on Dec 30 and adds ~$2.5MM revenue. Including Altitude, we expect Enghouse to report Q1 revenue close to consensus of $124MM (11% Y/ Y). Similarly, our adj. EBITDA forecast of $42.5MM (+29% Y/Y) is slightly below consensus of $42.7MM and our IFRS EPS estimate for $0.38 is below consensus of $0.39. Altitude is likely to lift Q1 adj. EBITDA and IFRS EPS in line with consensus.

• Expect +1% constant currency organic growth Q1, more conservative than consensus. We expect constant currency (CC) organic growth to rebound to +1% Q1 from -5% Q4, which is more conservative than consensus (likely at +4%). Over the last four quarters, Enghouse’s organic growth has ranged from -5% to +10%. We believe some of the headwinds experienced in Q4 (reduced usage of IMG, lower hardware and PS sales) would modestly dissipate Q1.

• Vidyo downloads remain healthy. According to Sensor Tower, there were 322k downloads of Enghouse’s Vidyo video conferencing app in Q1/FY21 (Jan-qtr), effectively flat with 324k downloads in the three months prior. In comparison, downloads of competitors’ apps such as Zoom and Webex slowed over the quarter. Sustained healthy Vidyo downloads suggest that Vidyo revenue may stabilize/improve compared to Q4.

• Waiting for reopening. In the last year (i.e., during COVID), Enghouse has deployed only an estimated $27MM on one acquisition (Altitude Software), down from $127MM deployed on five acquisitions in the prior year. We believe COVID-related travel restrictions and other challenges in this environment have restrained its pace of acquisitions. Enghouse is well capitalized (est. $92MM net cash following Altitude and $1.50/share special dividend). We believe re-acceleration in the pace of acquisitions with the reopening and reduction of travel restrictions would be a catalyst for the stock. Enghouse is currently trading at 17x FTM EV/EBITDA, below Canadian software consolidator peers at 19x and down from its peak of 22x in the summer.

• Maintaining Outperform and $80 price target. Our price target equates to 21x CY22e EV/EBITDA, above Canadian software consolidator peers at 19x given Enghouse’s higher hurdle rates and faster growth.