In a research report to clients today, Sangha initiated coverage of Cortex with a “Buy” rating and a one-year price target of $4.00, implying a return of 81.8 per cent at the time of publication.
Founded in 1999, Calgary-based Cortex serves companies that want to upgrade their invoicing from manual to electronic. The company initially served the North American oil and gas market, but has recently expanded to other verticals.
Sangha notes that a downturn in the oil and gas industry paired with a high cost structure and ongoing losses drove shares of Cortex down significantly between January, 2013 and January 2015. He points out that Joel Leetzow, who became CEO in May of 2015 has reduced the company’s operating expenses by 55 per cent while only seeing a slight decrease in revenue.
The analyst now believes Cortex has a clear path to a $20-million run rate by fiscal 2020. He believes the growth will pick up in fiscal 2017, accelerate in 2018 due to an increasing network effect and diversification into new verticals. Given this expanding green-field, he thinks the company looks cheap right now.
“We believe Cortex is significantly undervalued,” says Sangha. “Cortex currently trades at 1.3x EV/Revenue multiple of our CY17 estimates compared to its peer group trading at 3.1x EV/Revenue of consensus CY17 estimates, consisting of Canadian software companies and industry peers. Our target price of $4.00 is based on applying a 3.0x EV/Revenue multiple of our FY17 forecast of $10.9M, or 2.4x multiple to our FY18 revenue forecast of $13.4M.”
Sangha believes Cortex will generate EBITDA of $200,000 on revenue of $10.9-million in fiscal 2017. He expects these numbers will improve to EBITDA of $1.1-million on a topline of $13.4-million the following year.
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