OpenText is undervalued, says National Bank Financial

Its second quarter results are more evidence that OpenText (OpenText Stock Quote, Chart, News: TSX:OTC, Nasdaq:OTEX) is undervalued, says National Bank Financial analyst Richard Tse.

Yesterday, OpenText reported its Q2, 2017 results. The company earned (US)$45.03-million on revenue of $543-million, up 17 per cent over the same period last year.

“Open Text delivered record revenue of $543-million in the second quarter of fiscal 2017, up 17 per cent year over year, with solid operational performance of 34-per-cent adjusted operating margin,” said CEO Mark J. Barrenechea. “We made significant progress in advancing our vision, products and market reach over the last 12 months, and it is reflected in our financial results. “Businesses in all industries are transforming into software and analytic companies, and enterprise information management (EIM) is a key platform in enabling that transformation. The very nature of work has changed, and customers are seeking new platforms for content services, customer experience, supply chains, with discovery and analytics,” said Mr. Barrenechea. “Customers are seeing greater value from digitalization, and with Release 16 and our recent acquisitions, Open Text is well positioned to enable the next wave of digital transformation.”

Tse says it is important for investors to appreciate that OpenText’s EMC ECD acquisition has, in his view, a lower risk profile than many of its previous acquisitions, owing to the length of time OpenText has known the asset. He also believes that OpenText’s core business before the acquisition was showing signs of growing scale.

“Bottom line,” says Tse, “we continue to believe OTC / OTEX is an attractively valued name that’s not pricing in a growing base of recurring revenue through acquisitions. We also have an increased level of confidence with respect to its ability to effectively deploy capital, especially considering the Company’s flexible capital structure post recent financings and closure of the ECD transaction. Of our large cap names, we believe OpenText is one the most compelling.”

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (US) $45.00 on OpenText, implying a return of 37 per cent, including dividend, at the time of publication.

Tse thinks OpenText will post EBITDA of $767-million on revenue of $2.31-billion in fiscal 2017. He expects these numbers will improve to EBITDA of $989-million on a topline of $2.79-billion the following year.