Enghouse Systems Ltd T.ENGH

Alternate Symbol(s): EGHSF

Technology Software - Application

Enghouse Systems Limited provides vertical enterprise software solutions. The Company has two segments: Interactive Management Group (IMG) and Asset Management Group (AMG). The IMG segment specializes in customer interaction software and services. Its products include contact center, video collaboration, video health monitoring, video room systems, interactive voice response, artificial intelligence, outbound dialers, attendant console, agent performance optimization, customer survey, business intelligence and analytics. It also offers video recording, streaming and event enterprise solutions. The segment, through Lifesize, offers video solutions, which enables remote teams to connect with in-person teams. The AMG segment offers a range of products to telecom service providers, utilities, and the oil and gas industry. Its products include network infrastructure and revenue generation solutions. It also offers fleet routing, dispatch, scheduling, transit e-ticketing and others.

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Enghouse Systems Ltd

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Post by retiredcfon Sep 20, 2024 8:40am

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Post# 36232687

RBC

Their upside scenario target is $59.00. GLTA

September 6, 2024

Enghouse Systems Limited
Moving in the right direction

Our view: Enghouse's Q3 (fiscal quarter ended July) was slightly ahead of RBC/consensus. The upside stems from better than expected organic growth, which reached the highest level in 4 years and was above Enghouse's 10-year historical average. We see attractive risk-reward on the shares, considering valuation at trough levels (8.6x EBITDA), stabilizing organic growth, and M&A likely to ramp going forward. Maintain Outperform, $43.00 price target.

Key points:

• Q3 above RBC/consensus. Q3 revenue of $131MM (18% Y/Y) exceeded our estimate of $128MM (consensus: $130MM) on better than expected organic growth. Due to higher revenue and lower opex, adj. EBITDA of $38MM (13% Y/Y) exceeded RBC/consensus of $36MM. IFRS EPS of $0.37 was slightly above RBC/consensus of $0.36/$0.34.

Organic growth reaches the highest level in 4 years. We estimate that constant currency (CC) organic growth was -2% Q3, above the -4% in our model and up from -4% Q2. Organic growth is the highest since Q3/ FY20 and is above Enghouse's 10-year historical average (-3%). Enghouse indicated that it is seeing traction of its "choice" strategy to offer both SaaS and on-premise; Q3 was one of Enghouse's strongest quarters for new order bookings and recurring hosted & maintenance was up 23% Y/ Y, faster than total revenue.
M&A is a potential catalyst. Management is upbeat that there are a large number of acquisition opportunities in the market. Enghouse has deployed $70MM capital on acquisitions TTM, up from $43MM in the prior TTM period. The company is disciplined and appears to be waiting for sellers to meet its expectations. With cash near record highs ($259MM Q3) and our outlook for Enghouse to generate $122MM NTM FCF, we believe M&A is a potential catalyst for the stock. We estimate every $100MM deployed on acquisitions is 17% accretive to annual adj. EPS.
Buybacks are another potential use of cash. In light of Enghouse's cash and the low valuation of the stock (at 8.6x NTM EV/EBITDA), management suggested that the company could increase the pace of share buybacks. Enghouse has repurchased 134k shares YTD under its current NCIB (maximum 3.0MM shares or 6.9% of float until May 2025).
Discounted valuation doesn’t reflect Enghouse's long-term track record of compounding capital. Enghouse is trading 61% below peers at 22x and 42% below its 10-year average (15x). Enghouse has a strong track record of allocating capital at high rates, which has driven a 12% FCF/share CAGR over the last 10 years. We believe risk-reward on the shares is attractive given Enghouse’s discounted valuation, stabilizing organic growth, and our outlook for M&A to meaningfully ramp over the next 12-18 months. Our $43.00 price target is unchanged and remains based on 13x CY25e EV/EBITDA.