Sangoma Technologies has an 89 per cent upside, Beacon Securities says

Sangoma Technologies Corporation (Sangoma Technologies Corporation Stock Quote, Chart, News: TSXV:STC) is firing on all cylinders, says analyst Gabriel Leung of Beacon Securities, who on Wednesday reiterated his “Buy” rating with a raised target price of $2.15 for STC.

VOIP hardware and software company Sangoma reported its third quarter fiscal 2018 financials ended March 31, 2018, on Tuesday, highlighting sales of $16.24 million, a 138 per cent increase of the same quarter in FY17 and the thirteenth quarter in a row with higher revenue versus the previous year. The company’s gross profit came in at $8.90 million, double that of Q3FY17.

Also on Tuesday, Sangoma announced the closing of a bought deal private placement totalling $13.1 million, co-led by Acumen Capital Finance, INFOR Financial and PI Financial.

Leung says the company’s Q3 came in better than expected, as its revenues and EBITDA of $16.2 million and $1.9 million, respectively, beat his forecast of $13.2 million and $896,000, respectively.

“Overall, we believe it was another solid quarter for Sangoma with healthy organic revenue growth and good FCF generation,” says Leung in a client update. “With the recent cash infusion, higher FCF generation and improving profitability, we believe the company is in great position to continue to augment its organic growth profile (running between 15–20 per cent y/y) with accretive acquisitions.”

The analyst says that Sangoma’s acquisition earlier this year of the Converged Communications Division from Dialogic Corporation could result in a minor upside to the company’s gross margins once the acquisition is further integrated into Sangoma’s operating platform.

“Valuation-wise, we also feel view the stock as being very undervalued trading at 6.0x FY19 (ending June 2019) EV/EBITDA. Recall that larger comparable Mitel (MITL–Q, NR) was recently acquired for ~9.2x EV/EBITDA,” says the analyst.

Leung bases his $2.15 price target (was $2.00) on a 10x FY20E (ending June 2020) EB/EBITDA valuation, which represents a projected return of 89 per cent at the time of publication.