Open Text is still undervalued, says National Bank Financial

Open Text’s (Open Text Stock Quote, Chart, News: TSX, Nasdaq:OTEX) most recent acquisition doesn’t move the needle much, but National Bank Financial analyst Richard Tse still thinks the stock is undervalued.

Yesterday, after market close, Open Text announced the acquisition of Covisint (Nasdaq:COVS) for approximately (U.S.) $103-million. The company said the pickup of the enterprise information management offering would strengthen its position in the automatove industry.

Tse says the discounted valuation (a less than $75-million Enterprise Value) at which Open Text was able to grab Covisint for suggests some challenges at the company, but adds that he thinks the onboarding and streamlining of the company into OTEX will take less than a year. Overall, the analyst say this doesn’t shift his view of Open Text.

“Bottom line, this small acquisition does not change our thesis,” says Tse. “We continue to believe OTEX is an attractively valued name that’s not pricing in a growing base of recurring revenue through acquisitions. We also have an increased level of confidence with respect to its ability to effectively deploy capital, especially considering the Company’s flexible capital structure post recent financings and closure of the ECD transaction.”

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $45.00 on OTEX, implying a return of 39 per cent at the time of publication, including dividend.

Tse thinks OTEX will post EBITDA of $763-million on revenue of $2.29-billion in fiscal 2017. He thinks these numbers will improve to EBITDA of $978-million on a topline of $2.71-billion the following year.