Canaccord Despite believing its full-year revenue expectations may be unreachable, Canaccord Genuity analyst Aravinda Galappatthige thinks Telus International Inc. remains “deeply undervalued.”
In a research note, he said the central driver of its peers “very much revolves around making or missing 2023 guidances” with “significant” estimate revisions leading to “sharp swings” in share prices. That included 21.7-per-cent drop in Epam Systems Inc. (EPAM-N) on Monday following a reduction to its full-year guidance.
“As we noted in our initiation report, TI has put forward robust revenue growth expectations for F2023 of 20.3-22.8 per cent (10-12-per-cent organic),” he said. “This, in the backdrop of recent downward revisions to estimates and guidance downgrades by comps, appears high to the Street. We suspect this has been driving recent weakness in the stock. Only Globant’s guidance is projecting stronger revenue growth than TI, with EPAM now at down 3 per cent, Concentrix at 4-6per cent, Cognizant at negative 1.2 per cent to a gain of 0.8 per cent, and Genpact at 6-7.5 per cent. The key for TI now is the extent which some projects in its own pipeline convert (particularly those in advanced stages) within F2023. Importantly, TI’s outlook is also boosted by business from TELUS Corp, which rose 40 per cent year-over-year in Q1/23, having risen 20.9 per cent year-over-year in 2023. Furthermore, synergistic gains from the WillowTree acquisition can also be a material driver. We believe these factors can differentiate TI from its comps.
“Given that TI’s stock price is down 19.5 per cent year-to-date and 21.3 per cent quarter-to-date, we would surmise that a miss vs 2023 guidance is mostly built into the stock, while any sign of reaching even the low-end of expectations could drive a sharp rebound.”
Mr. Galappatthige thinks the company’s second-quarter call is likely to provide a clearer picture on its year moving forward.
“We note that the quarterly cadence implied within guidance suggests organic revenue growth rising towards the mid-to-low teens by H2/23 (and reported revenue growth to mid-20s), as WillowTree synergies play out more materially,” he said. “There should be greater clarity around this by July/August.”
The analyst maintained a “buy” recommendation and US$28 target. The average is currently US$26.08.
“TI’s stock now trades at 8.4 times EV/EBITDA 2023 estimates falling to 6.9 times in 2024 and a FCF yield of 8.1 per cent on F2023 estimates rising to 9.5 per cent on 2024,” said Mr. Galappatthige. “Considering TI’s longterm growth trajectory, including the expectation of mid-to-high teens growth beyond the present economic slowdown and high FCF conversion of EBITDA (approximately 50 per cent), these are compelling valuations.”