Sangoma Technologies
(STC-T) C$12.18
Q3/F22: Focus Turns to NetFortris Integration Event
We are updating our estimates and target price following Sangoma's Q3/F22 results. For our initial take, click here.
Impact: NEUTRAL
Focus on NetFortris integration. The near-term focus has shifted to integrating NetFortris and management has made significant progress in the 1.5 months since closing. Most of NetFortris' teams have integrated with those of Sangoma, with the notable exception being the sales team (e.g., avoid disrupting sales momentum, supporting the earnout structure). Early customer and partner feedback has been positive, helped by an even broader suite of solutions. NetFortris' managed security offering has garnered the most interest from Sangoma's customers and partners, to- date. Sangoma is already realizing some of the expected $4mm in cost synergies and it could achieve the full benefit within six months. Given NetFortris is at roughly breakeven Adjusted EBITDA, we continue to expect some moderation in Adjusted EBITDA margins in the next two quarters, with a rebound to pre-acquisition levels expected exiting F2023 (similar to the post-acquisition performance for Digium).
Share buyback under consideration. Given the significant pullback in the stock, the Board is considering a share buyback. Historically, Sangoma has refrained from buying back its shares, as it believed (rightly so, in our view) that its capital was better allocated toward its acquisition strategy. Management did indicate that the current macroeconomic and equity market conditions are making the acquisition environment more challenging, as the uncertainty is causing some potential targets to pause.
Star2Star shares coming out of escrow. On April 5, ~857k shares came out of escrow (issued to the StarBlue sellers) related to the Star2Star acquisition, with ~11.8mm shares to be released over the next four years.
Healthy >10% FCF yield. We are forecasting FCF of >$30mm in the next 12 months, implying a >10% NTM FCF yield. The expected strong FCF generation should help Sangoma to quickly de-lever (~2.2x net debt/pro forma EBITDA currently), enabling it to pursue its next acquisition and/or buy back its shares.
TD Investment Conclusion
We are lowering our target price to C$25.00 (from C$33.00), which is based on 2.2x (previously 2.8x) our C2023 revenue estimate. The decrease in our target multiple reflects the decline in peer-group valuations.