Three Canadian tech stocks analysts think will rise in 2018

2017 was another great year for Canada’s tech sector as it continued to erase memories of a time when the sector was a distant second fiddle to the mining and metals sector.

“It’s all pushing in the right direction,” says Michael Kousaie, Head of Business Development at the TSX, in conversation with Cantech Letter recently.

“We’ve seen 30 new tech companies go public this year, both big and small cap, and when I look at the private companies here in Canada, these companies are not merely good in their city or good in their province, they are good in Canada and good internationally.”

Kousaie says he sees the trend continuing.

“All of that bodes well for what goes on in the public markets because we’ve got more mature companies getting ready for the TSX,” he adds. “The groundwork has been laid really well.”

And while some stocks like Shopify and Kinaxis repeatedly pushed through analysts bullish targets over the past couple years there are still bargains to be had in the tech sector, at least according to analysts whose research is carried by Cantech Letter.

Here are three Canadian techs that analysts think will rise in 2018.

Following the company’s recent Q4 and fiscal 2017 results, Echelon Wealth Partners analyst Ralph Garcea maintained his his “Speculative Buy” rating and one-year price target of $2.50 on Nanotech Security (TSXV:NTS), implying a return of 82 per cent at the time of publication.

Garcea notes that the quarter fell below his expectation of $3.0-million in revenue, but says the company’s EBITDA topped the $800,000 he had modeled. The analyst says one number in particular jumped out at him.

“Gross margin in the quarter was a very surprising 84% versus our 70% estimate, which resulted in NTS’ second cash flow positive quarter. NTS continues to work with its Asian customer to fine-tune specifications for its banknote – management remains optimistic in its ability to generate revenue from this customer, although timing is now uncertain,” the analyst explains. “F2018 financial guidance was provided: 20-40% revenue growth excluding the Asian OTF order and 15-20% Adj. EBITDA margins. In tax stamps, NTS’ nano-optics has become qualified with its Indian customer that is supplying several billion holographic tax stamps to the Indian government and is working towards a final agreement – this has led to other opportunities in India beyond tax stamps in the broader foil packaging market. Management is confident that both the Asian and Indian tax stamp opportunity will turn into revenue and we believe the latter will be realised before the former.”

A new order for Espial Group (TSX:ESP) is just what the doctor ordered, says Haywood analyst Pardeep Sangha, who recently maintained his “Buy” rating and one-year price target of $3.00 on Espial implying a return of 62.2 per cent at the time of publication.

On December 20, Espial announced that high-speed internet and digital television provider Eastlink would adopt the former’s cloud-based SaaS platform. Eastlink is the largest privately-owned cable company in Canada. Sangha says Espial’s share price has been down for the past six months as the market has waited for a meaningful contract from its pipeline. The analyst says this is that order.

“Eastlink validates the Company’s cloud-based video platform and shift to a recurring revenue model,” he says. “Eastlink was previously a WHS customer that has since switched to a SaaS-based model. We assume Espial receives approximately $10 per subscriber per year of recurring revenue.”

It has struggled in the past, but Industrial Alliance Securities analyst Blair Abernethy thinks NexJ Systems (TSX:NXJ), a provider of integrated and scalable CRM systems, is ready to rise. In a research report to clients December 20, Abernethy initiated coverage of NexJ with a “Speculative Buy” rating and a one-year price target of $4.50, implying a return of 99.1 per cent at the time of publication.

“While NexJ has struggled to grow consistently in recent years, we believe the Company is now in the early stages of a long-term sustainable growth opportunity, with a shift towards a greater mix of recurring revenue,” the analyst says. “We believe NexJ has built a valuable product set that addresses the needs of financial services and insurance companies, and now has the opportunity to significantly expand its TAM and customer base with its new CDAi product. In our view, NexJ’s existing recurring revenue base and proven products provide a floor for the investor, while the new CDAi product provides significant upside potential with the application of AI and ML technologies.”