Halogen Software is still undervalued, says Stifel Nicolaus analyst Abernethy

Stifel Nicolaus analyst Blair Abernethy says recent high-profile IPO Halogen Software (Halogen Software Stock Quote, Chart, News: TSX:HGN) has a sustainable competitive advantage in a market where it has lots of opportunity to grow.

In May, Halogen went public on the TSX, raising just over $50-million by selling 4,365,218 shares at $11.50 each. The stock closed its first day at $13.20 and has since surpassed $14. In early June, Halogen exercised its “greenshoe” over-allotment option, issuing 720,000 additional shares at $11.50 to raise an additional $8.3-million.

The Ottawa-based company, which is a leader in the cloud-based talent management software space was founded in 2001 by current chairman and former Corel CFO Michael Slaunwhite and VP Yvon Martel. The company, which sells products that manage aspects of worklife such as recruitment and succession, posted 2012 revenue of $38-million.

Abernethy says Halogen already has a growing base of recurring revenue, and a “significant” opportunity to expand its footprint in the small-to-medium sized business market, which he says is under-penetrated.

In a research update to clients this morning, Abernethy initiated coverage of Halogen with a BUY rating and $17.50 one-year target.

Abernethy notes that there are currently more than 110,000 mid-market organizations in North America, and more than 300,000 around the world. Multiply this by Halogen’s average annual revenue per user of $20,000, and the market opportunity is $6-billion globally. And while Halogen is already an acknowledged leaders in the pace, its 1750 customers barely scratches the surface of this market, at just 2% of the North American market, and less than 1% globally, he says.

The Stifel Nicolaus analyst says Halogen has an advantage because its solutions are verticalized, which allows for easy implementation, and a consistent user experience. He says this tailored solution, combined with the company’s reputation for excellent customer service, makes its product very sticky. He thinks the advantage the company has carved out in the healthcare, manufacturing and finance and insurance verticals can be deepened and extended to other verticals and geographies.

Shares of Halogen Software closed today down 3.4% to $14.25.

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