Constellation Software will struggle to justify heady valuation, says Euro Pacific

Constellation Software’s (Constellation Software Stock Quote, Chart, News: TSX:CSU) growth through acquisition strategy has made it one of the great successes of Canadian tech, but the company’s top line growth is set to stall, says Euro Pacific analyst Andrej Krneta.

Constellation will report its Q4 and fiscal 2014 results today after market close.

Krneta expects Constellation will deliver 4.1% quarter-over-quarter top line growth to $435.9-million. He thinks this upside will result largely from about a half-dozen smaller acquisitions that were completed in the quarter and some contribution from a buyout that happened late in the third quarter.

But the analyst thinks Constellation may be getting toppy, valuation wise.

“We believe CSU’s top line growth will remain a challenge in the near term. The lack of targets and financial leverage may place limits on CSU’s acquisition-driven growth strategy,” he says. “With EBITDA% largely flat next year we are hard-pressed to justify a valuation multiple beyond the current 17x EV/EBITDA ‘15e. Instead, we kept our $405M FY2015e EBITDA forecast on 16x EV/EBITDA ‘15e, reflecting a well-run enterprise with a defensive profile amid macro volatility”.

In a research update to clients this week, Krneta maintained his “Hold” rating, but raised his one year target on the stock from $306 to $365, implying a return of -8% at the time of publication. The analayst explains that his target raise is due is “only due to currency (reporting-trading) translations”.

At press time, shares of Constellation Software were 4.75% to $414.