OpenText has 43% upside, says National Bank Financial

The completion of a key acquisition is another bullish sign for OpenText (OpenText Stock Quote, Chart, News: TSX:OTC, Nasdaq:OTEX), says National Bank Financial analyst Richard Tse.

This morning, OpenText announced that it had completed the previously announced (U.S.). $1.62-billion acquisition of Dell EMC’s enterprise content division, including Documentum.

“Customers are rethinking their enterprise platforms to better compete in the age of digital. EIM [enterprise information management] is the key platform to enable that transformation, and our acquisition of Documentum and the enterprise content division from Dell EMC significantly strengthens our market-leading position,” said OpenText CEO Mark J. Barrenechea. “We are pleased to welcome 5,000 marquee customers, 2,000 employees and over 300 partners to Open Text. Customers are responding very well to our Release 16 and this acquisition extends our leadership in content services, information archives, key verticals and the cloud.”

Tse says this acquisition hits the right note on several fronts.

“In our opinion, this is a strategically and financially accretive acquisition for OpenText,” he says. “From a strategic perspective, it cements OpenText’s position in Content Management while bringing on board technology that will help round out OpenText’s Enterprise Information platform. OpenText is expected to bring over 5,600 customers and 2,000 ECD employees. From a financial standpoint, we see the acquisition adding $0.35 in EPS in FY17 and $0.91 in FY18 – recall OpenText has a June fiscal year end. Finally, we see the EMC assets adding a base for not only additional acquisition growth but potentially organic growth as well. Altogether, that should help drive OpenText towards $6.00 in EPS (pre-split) as the Company approaches $3 bln in capital deployed.”

In a research update to clients today, Tse maintained his “Buy” rating and one-year price target of (U.S.) $90.00 on OTEX, implying a return of 43 per cent at the time of publication, including dividend.

Tse believes OTEX will generate EBITDA of $798-million on revenue of $2.3-billion in fiscal 2017. He expects this will improve to EBITDA of $986-million on a topline of $2.78-billion the following year.