Take a pass on Tecsys, Beacon Securities says

Tecsys Inc (Quote, Chart TSX:TCS) posted revenue and EBITDA misses in its recent quarterly report, leaving analyst Gabriel Leung of Beacon Securities to maintain his “Hold” rating and $16.50 target price.

Montreal-based Tecsys reported its fiscal first quarter 2019 last Thursday, with the company highlighting its record contract bookings for the quarter and backlog which increased by $6.1 million to $47.8 million. Nevertheless, the company posted revenue of $16.3 million, a year-over-year decrease of 1.4 per cent, along with EBITDA of $536,000, lower than Q1/18’s $687,000.

Both revenue and EBITDA were off the consensus estimates ($18.4 million and $2.1 million) as well as Leung’s expectations ($18 million and $1.7 million). In his client update on Friday, Leung noted that the revenue miss was largely driven by the supply chain management company’s professional services segment, saying that the low topline could have been due to timing on the start of some of its projects. The analyst also notes that TCS’s operating expenses were largely in line with expectations at $7.7 million, while free cash flow was $817,000 and operating cash flow was $926,000.

Leung says during the conference call, TCS management reiterated that healthcare activity continues to pick up. “While sales cycle remains long, we believe we could see accelerated bookings activity in this vertical in FY19 (notably some pharmacy management wins as well), which we view as a key catalyst for the stock (with acquisitions also being important),” Leung writes.

“We have maintained our $16.50 target, which is based on 17x FY20e EV/EBITDA (ending April 2020) and Hold rating. While we are very encouraged by TCS’s continued strong success in healthcare, we continue to look for a better entry point pending additional news flow around pipeline close rates, an acceleration in margin expansion, and/or M&A activity,” he writes.

Leung thinks Tecsys will generate EBITDA of $7.4 million on revenue of $76 million in fiscal 2019 and EBITDA of $11.0 million on a topline of $81.4 million in fiscal 2020. His $16.50 target represents a 0.0 per cent return on investment as of publication date.