Coveo Solutions Inc T.CVO

RBC

[retiredcf]

July 11, 2024

Coveo Solutions Inc
Share pullback following oversubscribed SIB pushes valuation back to near all-time lows

TSX: CVO | CAD 6.45 | Outperform | Price Target CAD 13.00

Sentiment: Neutral

Coveo’s SIB is oversubscribed due to one large tender. On July 11, Coveo disclosed the preliminary results of its substantial issuer bid (SIB), which was announced June 3 and expired on July 10. Under the SIB, Coveo expects to repurchase 6.5MM shares at C$7.70 per share, at the low end of the C$7.70-9.25 range. The aggregate purchase price of C$50MM is the maximum available under the SIB. This equates to 6.24% of total shares outstanding on a non-diluted basis. Coveo's SIB was oversubscribed, with 30.1MM shares tendered, largely due to 23.7MM shares from a single tender. We believe the single tender likely came from Elliott Investment Management, which is Coveo’s largest shareholders (currently owns ~24MM Subordinate Voting Shares, 23% of total shares) and was a large pre-IPO investor in Coveo. Excluding this shareholder, 6.5MM shares were tendered (~6% of shares outstanding).

Share pullback pushes valuation back to near all-time lows. Coveo’s stock dropped 19% yesterday on concerns that Coveo’s largest shareholder may continue to sell shares, in our view. As a result, Coveo is now trading at 2.4x NTM EV/S, well below peers at 8.9x and its historical average of 3.5x (range 1.8-5.4x); valuation is now within 0.6x of Coveo’s all-time historical low. Valuation at these levels appears overly discounted in our view given that Coveo is now profitable and is likely to see strengthening SaaS and ARR growth through FY25. We believe catalysts for valuation multiple expansion are: 1) re-accelerating RPO and SaaS growth; 2) visibility regarding new high-profile GenAI customer wins; and 3) improving cashflow.