If the company keeps winning business at its current rate, TECSYS (TSX:TCS) shares could double or triple over the next three years, says Cantor Fitzgerald Canada analyst Justin Kew.
On Thursday, TECSYS will report its Q3, 2015 results. Kew expects it will post EBITDA of $1.4 million on revenue of $14.2-million. Both numbers are in line with the street consensus.
Kew notes that the company’s backlog increased to a record $34.7 million in the second quarter. He believes this is an indication of the its success in securing healthcare deals, particularly with integrated delivery network deals (IDNs). IDNs are a network of health care organizations that reside under a parent holding company.
The analyst explains that TECSYS has a lot of runway left in the healthcare vertical.
“TECSYS currently has a 5.3% IDN penetration rate, based on 16 contracted IDNs in a universe of approximately 300. In addition, management expects to grow to 20 IDNs (or 7% penetration) over the next two quarters. Management has stated in the past that each new IDN win generates approximately $1.5 million in revenue in the first year and approximately $5 million in revenue in the first four years. The incremental annual revenue between year 2 and year 4 is therefore approximately $1.2 million”.
Kew posits a number of scenarios for TECSYS’s growth. He notes that 38 IDN wins between fiscal 2016 and 2019 would earn TECSYS a 12.5% market penetration and generate fiscal 2019 revenue of $79-million. 53 wins, he says, would mean a 17.5% penetration and $96-million in revenue. And 68 wins would earn a 22.5% penetration and $113-million in revenue.
The other key factor in determining the upside of TECSYS is margins, says Kew. The company currently has 10% EBITDA margins, but management has stated it would like to increase this number to 20% in the long term. The analyst models a number of scenarios that combine IDN market share and margins. At his target of 15% margins, shares of TECSYS would be worth $19.37 under the middle scenario of 17.5% penetration.
In a research update to clients this morning, Kew maintained his “Buy” rating and one year target of $9.50 on TECSYS.