Now’s not the time to buy Tecsys, Beacon Securities says

Supply chain management software company Tecsys Inc. (TSX:TCS) may still be a good long-term play but investors would be best served by waiting for a stronger entry point, says analyst Gabriel Leung with Beacon Securities, who maintains his “Hold” rating and $15.00 target price.

Yesterday, Tecsys released its third quarter of fiscal year 2018 ended January 31, 2018, results, posting total revenue of $17.2 million, which came in one per cent lower than the $17.4 million for Q3 2017. Profit was $0.7 million or $0.06 per share in comparison to Q3 2017’s $0.9 million or $0.07 per share, with an EBITDA of $1.3 million compared to $1.9 million for Q3 2017, with management saying that a weaker US dollar had an unfavourable impact on profit from operations.

“In the third quarter of fiscal 2018 we were delighted to add another [integrated delivery network] to our client list as well as expand within our base of hospital networks as we signed additional contracts for point-of-use implementation within our customer base,” said Peter Brereton, President and CEO of TECSYS, in a press release.

“In constant currency, revenue rose 2% in the quarter, and bookings were strong. We have continued to reduce operating expenses to enable more of our revenue to fall to the bottom line. Even before adjusting for currency, our operating expenses as a percent of revenue continue to drop and our YTD operating earnings are up 32% or 53% after adjusting for currency swings,” said Brereton. “The pipeline looks good, our backlog remains strong, and the fourth quarter is off to a very strong start with the signing of a large new enterprise IDN contract and several base account projects,” he said.

TCS had a strong back end to 2017 and into January 2018, with its share price jumping almost 30 per cent from the start of September to the end of January.

Leung points out that the company’s proprietary product revenues declined 40 per cent year on year in Q3. Tecsys’s cloud, maintenance and subscription revenues declined one per cent over the quarter, while professional services increased by six per cent, year on year.

“Overall, we believe fiscal Q3 was an underwhelming quarter, although Q4 appears to have started strong,” says the analyst in an update to clients on Friday. “We continue to believe Tecsys remains a great long-term fundamental play, particularly given its dominance in healthcare. We believe this organic story could also potentially be enhanced through acquisitions.”

“That said, at its current valuation of 18x EV/EBITDA, we feel investors should wait for a better entry point or pending evidence of an acceleration in Tecsys’ growth/operating leverage profile,” says Leung.

The analyst thinks Tecsys’s FY18 revenue and EBITDA will come in at $71.1 million and $7.5 million, respectively, and that FY19’s revenue and EBITDA will be $77.2 million and $10.3 million, respectively.

Leung maintains his “Hold” rating and $15.00 target, which is based on 17x FY19e EV/EBITDA. The target price represents a -5.0 per cent potential return at the time of publication.