Softchoice Corp.
(SFTC-T) C$21.56
Highlights from Our Management Meeting Event
We met President and CEO Vince De Palma, CFO Bryan Rocco, and COO Andrew Caprara to get an update.
Impact: NEUTRAL
Demand remains solid. Despite general increased concerns over a recession, management indicated that it is not seeing any slowdown in demand, even in the more economically sensitive SMB market (~21% of LTM gross profit). Due to IT supply constraints, which management does not expect to alleviate until late-2022/ early-2023, more customers are planning projects much earlier, giving Softchoice better visibility into customer demand. IT has arguably become more strategic in helping drive increased revenue and efficiencies/cost savings, which we believe should help reduce the impact of a recession compared with previous downturns. Management also continues to hire to meet current and expected demand (e.g., it still expects to hit its target of 423-433 AEs by year-end vs. 411 at the end of Q1/ F22), with it continuing to experience a favourable hiring environment.
Project Monarch on track. Management remains confident in achieving its F2022 guidance of >$320mm in gross profit (>11.5% organic growth) and ~30% Adjusted EBITDA margins (>$96mm in Adjusted EBITDA). Its confidence is supported by Monarch-driven benefits including pricing improvements (aided by its new CPQ system) that are tracking ahead of expectations.
Still focused on share buybacks and dividend increases. Softchoice continues to actively buy back shares under its NCIB. After repurchasing ~129k shares for ~C$3.1mm in Q1/F22 (~C$24.03/share), it has bought back ~449k shares for ~C $9.8mm in April and May (~C$21.90/share; it has not yet filed its share repurchases in June). The dividend also remains a key priority, with future increases likely in the cards, in our view. Although Softchoice is open to making acquisitions (focused on buying skills/talent and IP), it is not actively searching for potential targets, but it does evaluate inbound opportunities. Management indicated that private market valuations have generally not yet adjusted to the decline in the public markets.
TD Investment Conclusion
We are maintaining our C$32.00 target price, which is based on 13.0x our F2023 Adjusted EBITDA estimate.