Cantor Fitzgerald Canada analysts Tom Liston and Justin Kew say recent IPO Halogen Software (TSX:HGN) is addressing a talent management space that is large and under-penetrated, and the stock remains a value, despite a bump in price since its IPO.
This morning the analysts initiated coverage of Halogen with a BUY rating and $18.25 one-year target. The pair listed the major themes that support their idea that the company’s stock has upside.
Halogen’s revenue, they say, is highly predictable because 90% of it is recurring. And the company’s growing customer list is highly diversified, with its top five customers contributing just 6% of total revenue. They believe the company is a natural to win business in the talent management vertical because its solution is highly regarded; Gartner, they point out, ranks Halogen in its “visionary” quadrant; and Forrester ranks the solution as a “strong performer”.
In May, Ottawa-based Halogen, which was formed in 2001, 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 the $15 mark. 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.
Liston and Kew point out that just 12% of companies have currently implemented talent management tools, and that number is even lower in the mid-market part of the vertical, where Halogen plays. These are companies that employ between 100 and 10,000 people. The analysts believe that the size of this market is approximately $2.7-billion per year in the United States alone.
The Cantor Fitzgerald Canada analysts say their target on Halogen Software is based on 5.4x their estimate of 2014 EV/revenue and 4.4x 2015 EV/revenue. They note the company’s peer group is trading at 6.5x 2014 EV/revenue.