Seeing “compelling valuations for a mix of decent growth and resilience,” Desjardins Securities analyst Jerome Dubreuil initiated coverage of four information technology companies with “buy” recommendations on Friday, touting “the continued robust demand for digital transformation services, growing adoption of the cloud and relative resilience of IT services vs other tech sub-sectors.”
“The IT services stocks under our coverage were not spared from the tech stock rout which began last November, with the share prices of our covered names down an average of 8.5 per cent since November 15,” he said. “Excluding GIB.A, our covered names are down 39 per cent, mirroring the S&P/TSX Information Technology Index. With the economy not out of the woods yet, we see the robust profitability and cash flow generation of the IT services sub-sector as attributes that investors may continue to favour in the coming months. Moreover, with valuations for our coverage universe being below the peer average despite expectations for faster 2023 EBITDA growth, we view the current valuations as attractive.”
“While the pandemic forced many companies to increase investment in their remote work capabilities, we do not see a reversal in IT budget spend with a ‘return to normal’. On the contrary, given management teams have seen solid returns and employees have adapted to an evolving work environment, companies now view IT investment as a competitive advantage vs just a cost of doing business. Moreover, given that general labour market tightness appears to be increasingly structural, we see a long runway of accelerated technology adoption as companies seek to cut costs and spur growth in this more difficult economic environment.”
Mr. Dubreuil named Quisitive Technology Solutions Inc. his “preferred name” and gave it a $1.40 target. The average on the Street is $1.69.
“With its low valuation, high insider ownership, strong organic growth of approximately 20 per cent and LedgerPay optionality, QUIS is our preferred name,” he said. “We view its core Cloud business as a solid foundation which should continue to grow at 15–20 per cent year-over-year due to recent acquisitions and attractive IP/SaaS products (as evidenced by its relatively high margins). Its Payment segment currently grows at an even faster 20 per cent year-over-year organically and with the introduction of LedgerPay, provides exposure to the payments industry (which is relatively shielded from inflation) while using core data analytics and cloud competencies. Our view is that the market gives QUIS no credit for LedgerPay’s potential and currently undervalues the core Cloud business, which is growing much faster than its peers.”
In order of preference, he also initiated coverage of these stocks:
2. Converge Technology Solutions Corp. (CTS-T) with a $10 target. Average: $10.55
3. CGI Inc. (GIB.A-T) with a $126 target. Average: $127.77.
4. Alithya Group Inc. (ALYA-T) with a $3.75 target. Average: $3.88.