OpenText gets price target raise at Industrial Alliance

A recently closed acquisition has Industrial Alliance Securities analyst Blair Abernethy tweaking his estimates on OpenText (OpenText Stock Quote, Chart, News: TSX, Nasdaq: OTEX).

This morning, OpenText announced it had closed the previously announced $240-million acquisition of cybersecurity firm Guidance Software. Guidance’s most recent annual revenue number was $108.6-million (all figures USD).

“Information security, forensics and discovery are critical components as companies compete in the digital economy,” said OpenText CEO Mark J. Barrenechea. “The acquisition of Guidance Software underscores our commitment to the digital enterprise and broadens the OpenText Discovery portfolio through industry-leading digital investigation, forensic security and data risk management solutions. We are pleased to welcome Guidance customers, partners and employees to Open Text today.”

Abernethy says this is not a significant pickup for OTEX but the analyst did update his numbers, resulting in a modest price target increase.

“This acquisition will contribute an insignificant amount to Q1/F18 revenue, and is expected to be on OpenText’s operating margin model within a year,” he notes. “OpenText expects the Purchase Price Allocation (PPA) combined with integration-based revenue disruptions to impact revenue by up to ~$30M. Accounting for the PPA and the timing of the deal, we estimate that this acquisition should add ~$58M or 2% to our F2018 OpenText revenue estimate and ~$84M or 3% to F2019.”

In a research update to clients today, Abernethy maintained his “Buy” rating, but raised his one-year price target on OpenText from (US) $37.50 to $38.00, implying a return of 15.2 per cent at the time of publication, including dividend.

Abernethy thinks OpenText will generate EBITDA of $892-million on revenue of $2.71-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $963-million on a topline of $2.79-billion the following year.