Enghouse Systems Ltd T.ENGH

RBC

[retiredcf]

Their upside scenario target is a near double ($59.00). GLTA

December 9, 2024

Enghouse Systems Limited
Q4 preview: Waiting for catalysts

Our view: We believe Enghouse’s shares are likely to trade sideways through Q4 results, which we expect to be largely in line with consensus, as Enghouse has not made any acquisitions since May 2024. Looking forward, we see several potential catalysts for the stock, which if they materialize, would help increase growth and lift valuation from currently discounted levels. Maintaining Outperform rating and $43.00 price target.

Key points:

• Expecting Q4 largely in line with consensus. Enghouse will report Q4/ FY24 (Oct-qtr) on December 12 after market close. We forecast Q4 revenue up 8% Y/Y to $133MM, effectively in line with consensus ($134MM). Due to tough Y/Y comps (elevated margins Q4/FY23), our outlook calls for adj. EBITDA up only 3% Y/Y to $39MM, in line with consensus ($39MM). For IFRS EPS, we expect $0.44, vs. consensus of $0.41; the variance to consensus likely reflects different tax assumptions.

• Pace of M&A remains below Enghouse’s potential. As of Q4, Enghouse has estimated $255MM net cash and generated $125MM TTM FCF (9% Y/Y). Due to the lack of acquisitions in Q4, the company has deployed only $43MM of capital on two acquisitions in FY24, down from $56MM in FY23. While the company has a large M&A pipeline, Enghouse appears to be waiting for sellers to meet its pricing expectations. We estimate every $100MM deployed on acquisitions to be 17% accretive to annual adj. EPS.

• Organic growth likely to continue stabilizing and align with Enghouse’s historical average. Our Q4 revenue estimate assumes -3.4% constant currency organic growth, which is a significant improvement from -7% FY23 and -8% FY22. Our Q4 estimate is effectively in line with Enghouse’s 10-year average (-3%).

• Waiting for catalysts. In addition to the lack of M&A this quarter, Enghouse has not materially deployed capital on share repurchases. Based on SEDI disclosures, Enghouse repurchased only 99k shares for $3MM in Q4, which brings FY24 repurchases to $6MM. Enghouse has potential to deploy material capital on share repurchases given the stock’s FCF yield of 8.2%. A higher pace of share repurchases would improve EPS growth and may help lift the stock. Moreover, we believe that the hiring of a new President to replace Vince Mifsud could also be a potential catalyst for the stock.

• Discounted valuation doesn’t reflect Enghouse’s long-term track record of compounding capital. Enghouse is trading 58% below peers at 22x and 36% 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.