Many of Canada’s best technology names are mature companies with recurring revenue streams that make them particularly attractive in the current market downturn, says Cormark analyst Richard Tse.
In a research report to clients this morning, Tse talked about a phenomenon that has seen certain companies that performed well in the bull market showing resilience in the recent downturn. The analyst spots a commonality; these are techs that have matured to a point where their revenue is “sticky” because of long-term contracts, cloud, or maintenance revenue.
Tse highlighted four Canadian tech stocks he sees as particularly attractive right now; OpenText (OpenText Stock Quote, Chart, News: TSX:OTC), CGI Group (CGI Group Stock Quote, Chart, News: TSX:GIB.A), BSM Technologies (BSM Technologies Stock Quote, Chart, News: TSXV:GPS), and Constellation Software (Constellation Software Stock Quote, Chart, News: TSX:CSU).
Open Text, says Tse “is one of the best bets in this current downturn”. He expects that the Waterloo-based company will grow its topline by 18% in fiscal 2015, and has a wide range of potential acquisition targets. The analyst has a “Buy” rating and (US) $67.00 target on the stock, which at press time was trading at $52.80.
Tse says CGI Group is currently trading at a 10% discount to its peers. He thinks the company’s recurring revenue rate may be misunderstood. “While only 52% of CGI’s revenue is outsourcing under long-term contracts, we believe a third to half of the company’s systems integration business is tied to those outsourcing contracts, taking CGI’s recurring revenue base closer to 70%,” he says. Tse currently has “Buy” rating and $45.00 one-year target on CGI, which was trading at $33.83 at press time.
BSM Technologies, says Tse, is one of the “most compelling” smallcap names on his radar. His current “Top Pick”, the analyst notes the company has 65% recurring revenue and $0.26 per share in net cash. He expects the company will grow its topline by more than 23% in fiscal 2015. Tse currently has a $3.50 one-year target on BSM, which at press time was trading at $1.47.
Lastly, Tse warns that Constellation Software, which he considers to be “one of the most defensive” names in his coverage universe, isn’t cheap. But with 63% recurring revenue and a spate of opportunities in Europe, he thinks the stock can continue to add to its remarkable recent performance. The analyst has a “Buy” rating and a $325.00 one-year target on the stock, which at press time was trading at $272.90.
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