Over the past several weeks, we have spent a lot of time looking back.
2012 was quietly the turnaround year we had hoped for in Canadian tech, the sector ended the year tops on the TSX.
Of course the story of 2012, at least for the first half of the year, was the continuation of the longer M&A trend that saw some of our most promising companies snatched up by mostly U.S.-based equity firms and companies. The second half of the year, however, saw a distinct reversal of this trend, with companies such as DHX Media, Patheon, Redknee, CGI Group and Macdonald Dettwiler boldly acquiring assets abroad.
Two more such companies picked up hardware at the 2012 Cantech Letter Awards on January 11th in Toronto.
Today we look forward to 2013 with a collection of top picks from some of Canada’s best tech analysts, listed in random order.
Tom Liston, Cantor Fitzgerald Canada
Descartes Systems Group (TSX:DSG)
LISTON: Descartes is a Top Pick. We currently have a BUY recommendation and an $11.00 price target. DSG recently reported yet another record quarter (revenue, EBITDA and baseline metrics). As mentioned in our report on Descartes’ User conference late last year, our conversations with several customers and partners support our investment thesis: its continuation as a highly strategic vendor to many of the world’s best companies whereby its “network effect” has resulted in a very strong pipeline. Descartes’ shares have material upside on the basis significant new customer wins and pipeline while also providing downside protection with its high recurring revenue and industry leading margins. Descartes has recorded 32 consecutive quarters of EBITDA improvement.
_____________________Mark Belcarz Rob Goff
Rob Goff and Mark Belcarz, Byron Capital Markets
Rogers Communications (TSX:RCI.B) and DHX Media (TSX:DHX)
GOFF and BELCARZ: We consider Rogers Communications a core, defensive, large capitalization stock, attractively valued against the strength of its assets, free cash flow (FCF) and management. We see consistent 5%+ annual dividend increases together with share repurchases at roughly 5% annually.
DHX Media Ltd.’s (TSX DHX) economic proposition is arguably the easiest and most compelling across our coverage universe. Internal production and accretive acquisitions (Cookie Jar Entertainment [CJE], W!ldbrain) have positioned DHX as the largest independent producer and distributor of children’s content with a library holding 8,550 half-hours of content that the company has suggested a valuation at $1.6+ billion, or $15.67 a share, on replacement value. Its portfolio includes established and emerging brands, most notably Caillou, YGG, Johnny Test and Inspector Gadget.
Steve Li, Industrial Alliance Securities
Our Top Pick for 2013 in the technology space is TECSYS Inc.
LI: TECSYS was the best performer in our coverage for 2012. While the stock rose 57% during the year, we believe there is still plenty of upside to go. The company is a niche player in the SCE space, serves over 600 customers, and focuses primarily on three verticals: Healthcare, Complex Distribution and SMB.TECSYS’ focus in select verticals allows the company to create a strong brand image and competitive advantage in the space. For example, the company is already the unequivocal leader in the healthcare space, commanding over 75% market share of the IDNs in the U.S. In the complex distribution space, TECSYS boasts market share of almost 30% in the U.S. for Caterpillar dealers. The company has been endorsed by Gartner and was described as a “visionary” in their Magic Quadrant.
TECSYS’ top-line grew at ~24% YoY in average for the past three quarters and maintains a near-record backlog of $25.5M (or ~60% of annualized revenue). Approx. one-third of its revenues are recurring in nature, which gives the company stable and predictable cash flows. Given its strong reputation, some large integrators have started to work with TECSYS, which could serve as another boon if those integrators decide to expand the relationship and market TECSYS’s solution. Additionally, the company has a pristine balance sheet: as of October 31st the cash balance stands at $8M in cash and with $5M in debt.Relative to its peers, TECSYS is undervalued across all multiples. TECSYS trades at 0.9x EV/SalesFY13, 7.8x EV/EBITDA FY13 and 13.3x P/E FY13 , a discount to its peer group which trades respectively at 3.7x, 11.2x, and17.1x. Moreover, the SCE/ERP space continues to see consolidation, the most recent being RedPrarie’s acquisition of JDA Software for 7x maintenance revenue, while TECSYS is currently valued at 2.5x.
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Douglas Loe, Byron Capital Markets
Paladin Labs (TSX:PLB) OncoGenex (NASDAQ:OGXI), and IMRIS (TSX:IM)
LOE: We are featuring Vancouver/Washington-based oncology drug developer OncoGenex Pharmaceuticals Inc. (OncoGenex) as one of our Top Picks for 2013 in our diversified Canadian healthcare coverage universe. The firm is already well-partnered in a US$430 million development alliance with global specialty pharma giant Teva Pharmaceuticals (TEVA – Q) for lead clusterin-targeted ISIS-licensed antisense drug OGX-011, for which three sizable pivotal Phase III studies are already enrolling patients or about to be. Survival data from one of these – the 1,000-patient first-line castrate-resistant prostate cancer (CRPC) trial codenamed SYNERGY, testing OGX-011 in combination with historic standard-of-care docetaxel/prednisone, and for which patient enrollment concluded last month – could be available as early as Q4/13.
Paladin Labs has a long-standing track record of generating profitable revenue growth by in-licensing approved (or approval-pending) pharmaceutical and OTC products for marketing within its Canadian pharma sales network, a track record that to describe as impressive would be to risk understatement. Even without considering how Paladin could deploy available cash to consummate multiple future product licensing deals (was $234.4 million at end of Q3/12; new LT liabilities from Litha of $35.6 million), we see a robust pipeline of already-licensed drugs driving top-line growth without sacrificing margin.
IMRIS manufactures and markets patented, high-resolution (and high-priced) intra-operative magnetic resonance (MR) systems that are integrated into a surgical suite platform branded as VISIUS by the firm. In many respects, IMRIS alone is driving the global surgical MR industry with VISIUS, though consolidated medtech firms like GE have published with collaborators on the medical utility of real-time intra-operative MR imaging. IMRIS’ main competition is probably the decision not to purchase VISIUS rather than to purchase a competitive device.
Ron Shuttleworth, M Partners
Descartes Systems Group (TSX:DSG)
SHUTTLEWORTH: Entering the year, we picked three top stocks which are Descartes (TSX:DSG), Mitel Networks (TSX:MNW) and Redknee (TSX:RKN) If we had to choose one stock of the three as our top stock entering FY’13, our choice would be Descartes Systems Group for the following reasons:
1. Its performance is exceptionally predictable due to 95% recurring revenue.
2. It has exceptional earnings margins that approach 30% EBITDA
3. It is a dominant technically innovative player in a niche market that is essential to the global value chain.
4. It is growing earnings by around 15% per annum.
Our $12.25 target implies a 32% return from current share price levels. The company has approximately $74M of cash, no debt and good institutional support although liquidity is modest.Our $5.00 Mitel target implies 42% returns from current prices, which is higher than Descartes Systems Group. However, the company has performed less predictably over the past six quarters, and has net debt of approximately $225M, so it may be considered to have a higher risk profile than Descartes. Our Redknee target of $2.60 implies 26% return, which is lower than the return implied by our Descartes Systems target. Redknee is going through a transformative period, which makes it an exceptional long-term stock. However, there is more short-term risk associated with the integration of it recent acquisition of Nokia Siemens Network Business Services Solutions, than with Descartes Systems Group.
Robert Young, Canaccord Genuity
YOUNG: My top pick for 2013 is CounterPath. In 2012, the telecom software vendor passed a number of important milestones. The company graduated to the TSX and the NASDAQ from junior exchanges, bolstered its balance sheet for growth with a successful cash raise and printed it’s first profitable quarter. In the year ahead, and particularly at mobile World Congress, we believe that CounterPath will be exposed as an strategic solution to a very big problem facing the carriers of the world. Service providers like Rogers (a customer) are becoming desperate for a competitive response to new Over the Top (OTT) services like Apple FaceTime, Microsoft Skype, Google Voice, WhatsApp, Facebook Messenger and more. We think 2013 is a tipping point. Rather than accept that these upstarts will run on top of their network and take the high margin voice and messaging service revenue, we believe that carriers will introduce their own OTT flavoured solutions. Rogers One Number, based on CounterPath software, is an early mover in this respect. CounterPath offers carriers the tools to control the IP voice, video and messaging value chain under their own branding and avoid becoming low margin bit pipes for Apple, Google and Facebook. Underpinning this new opportunity, CounterPath also has a strong enterprise software business that helps organizations reduce cost with VoIP and grapple with new mobility and BYOD trends. CounterPath has a strong base and an impressive customer list (more than 250 strong) that includes many blue-chips such as Coca-Cola, Citibank and Bosch. Both opportunities are the product a decade of R&D protected by a rich patent portfolio. We expect good things from CounterPath in 2013.
Tom Astle, Byron Capital Markets
Research in Motion (TSX:RIM)
ASTLE: Two of our large cap names have very crucial product launches in 2013 – RIM with BB10 and Bombardier with the C-Series. A tough choice, but we have chosen to go with RIM as our top pick as we see more certainty and potential leverage here – albeit with significant risk for a large cap name. In early November we launched with a BUY strictly on the basis that the stock, at that time, was trading at a significant discount to tangible book value and that its new BB10 product was getting good initial reviews and that as this product launch materialized the sentiment would allow the name to return to book value. This happened, and now the ride higher is more dependent on potential earnings power – but if we use what we think are some reasonable assumptions we can see $1.50 in EPS in C2014, which we think could lift the stock another 20% – 25%.
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