Trending >

Echelon Wealth: here’s how to play the Canadian enterprise software sector

descartes systems group

Descartes CEO Ed Ryan.
Tech investors should be looking at the enterprise software space and Canada gives them several good investment options, says Echelon Wealth Partners analyst Ralph Garcea.

In a comprehensive research report to clients today, Garcea launched coverage of the sector with a piece entitled “The Consolidators – Avoiding the Speed Bumps”. The analyst says we are in the “middle innings of a multi-year cyclical transition in which organizations are focusing on technology solutions such as analytics, cloud storage and big data to gain or maintain a competitive edge while taking advantage of subscription-based pricing.

Garcea notes that Gartner says the enterprise software industry globally is worth about $321-billion, and he expects it will hit $500-billion by 2025. One of the defining features of the space today, notes the analyst, is its trend towards consolidation. He points out that there was an abundance of M&A in the sector in 2016 and expects with so many companies and so many founders who are in their 50s and 60s, the trend will continue for several years. But he cautions that the days of bargains may be over.

“We see private equity more and more chasing software deals as they put money to work, driving up valuations,” says Garcea. “This is when discipline is key to ensure that you do not overpay.”

HIRE Technologies

The analyst says the Canadian Enterprise Software sector is competitively priced at an EV/Sales of 3.9x and EV/EBITDA of 19.2x against its Global Software comparables, which are priced at at an average of 5.3x and 14.4x.

Garcea says here at home there are several ways to get into this sector with Canadian content, and thinks one in particular is a particularly good bet right now.

“From a Canadian perspective, there are several different ways to invest in the consolidation game in the global software industry,” says the analyst. “Open Text plays in the EIM market and related segments. Constellation Software focuses on VSM and Enghouse Systems is focusing on the Interactive/Asset management segments. Most of the stocks pay a dividend, and we think given the “law of large numbers”, Enghouse has the highest probability of doubling in size over the next three years. Descartes Systems has an enviable record of consolidating the logistics segment, and we expect TECSYS to continue its inorganic growth after the successful Logi-D deal. Redknee is the cheapest from a valuation standpoint, as the Street waits to see what ESW/Crescendo’s plans are. Absolute provides a good way to play the growth in cybersecurity spending. While we do not cover Kinaxis, we do note that Halogen Software is getting acquired by Saba Software for $12.50/shr (valued at an NTM EV/Sales of 2.1x and EV/EBITDA of 17.8x).

Garcea currently has “Buy” ratings on OpenText, Descartes Systems Group, Enghouse Systems, and Absolute Software. He has a “Speculative Buy” rating on Redknee Solutions and a “Hold” rating on Constellation Software. “In addition, the analyst currently launched on IT Services companies CGI Group (Buy), Pivot Technology (Buy) and Calian Group (Hold).

  •  
  •  
  •  

About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

RELATED POSTS