Open Text is still a buy, National Bank Financial says

The stock has risen since September 27, when he told investors to be buyers of Open Text (Open Text Stock Quote, Chart, News: TSX: OTEX, Nasdaq: OTEX), but National Bank Financial analyst Richard Tse still thinks the stock is a buy.

On Thursday, Open Text reported its Q1, 2018 results. The company earned (U.S.) $36.69-million on revenue of $640.7-million, a topline that was up 30 per cent over the same period last year.

“Open Text delivered strong first quarter results growing total revenue to $641-million, representing 30 per cent year-over-year growth while delivering $220-million of adjusted EBITDA [earnings before interest, taxes, depreciation and amortization], representing 32-per-cent year-over-year growth,” said CEO Mark J. Barrenechea. “Our annual recurring revenues grew to $489-million, representing 29 per cent year-over-year growth. We are off to a very strong start to the new fiscal year.”

Tse says there were a lot of things to like about this quarter.

“OpenText reported FQ1 (Sept) 2018 results that we’d categorize as a slight beat,” the analyst says. “Revenue was ahead of both our and consensus expectations while EPS was more or less in line. More importantly, the integration of recent acquisitions (especially ECD) seems to be on track and progressing well. Candidly, everything we saw in the FQ1 results and heard on the conference call reaffirms our investment thesis. That thesis calls for a growing base of recurring revenue through M&A, expanding operating leverage and optionality from what we believe to be developing organic growth initiatives that’s not priced into the stock. While the stock has recovered +8% (vs. TSX +3%) since our bullish Sept. 27th note, we’d continue to be buyers at these levels given the relative value to the group.”

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $45.00 on Open Text, implying a return of 33 per cent at the time of publication.

Tse thinks Open Text will generate EBITDA of $997-million on revenue of $2.85-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $1.14-billion on a topline of $3.19-billion the following year.