Record revenue growth and key acquisitions are cause for a revaluation of Constellation Software Inc. (TSX:CSU), says Ralph Garcea of Echelon Wealth Partners, who has upgraded his rating from “Hold” to “Buy” and raised CSU’s target price from $800.00 to $1,000.00.
This week, diversified software company Constellation Software released its fourth quarter results for the period ending December 31, 2017, featuring a 22 per cent increase in revenue ($688 million as compared to $564 million in Q4 2016) and an adjusted EBITA increase of 15 per cent to $175 million.
Those attractive numbers combine with some key acquisitions of late, including Quebec-based Acceo Solutions Inc., through its wholly-owned subsidiary N. Harris Computer Corp., announced in January.
Garcea sees a number of positives running through CSU, including having a diversified set of products matched with a diversified, global customer base (where the company boasts a greater than 92 per cent retention rate), highly predictable revenue and great capital allocators, according to Garcea.
“Deal metrics need to have ROICs of >30% to get evaluated. We believe ROICs will trend lower over time, but still remain over 30%,” says the analyst in a note to clients on Thursday. “CSU has ~80 ‘portfolio managers’ looking at deals with autonomy to do deals valued under $20M. Anything over $20M gets extra scrutiny from head office. We expect deal flow to increase, and to expand across geographies,” he says.
“On C2018E, CSU is trading at an EV/Sales of 4.7x and EV/EBITDA of 18.0x, versus the Global Software comparables at 6.2x and 21.5x, respectively,” says the analyst.
Garcea upgrades his “Hold” rating to a “Buy” and raises his DCF-based target to $1,000.00, representing a projected return of 19.6 per cent at time of publication.