Sangoma Technologies is undervalued, says Beacon’s Gabriel Leung

Shares of Sangoma popped eight per cent in trading on Friday as investors reacted to the company’s Q2/19 results, which featured revenues of $29.2 million, a 149 per cent year-over-year increase, and EBITDA of $2.4 million, an 89 per cent year-over-year increase.

”We are all thrilled to see sales approaching $30 million for the first time this quarter,” CEO Bill Wignall said. “As evidenced by revenue growing to almost 2.5 times last year, the company has maintained strong sales momentum, even with all the integration focus. And despite most of the cost savings being realized late in the quarter, EBITDA nearly doubled and we now expect to meet the 13 per cent EBITDA target we had projected for fiscal 2020, well ahead of plan, and by Q4 at the latest.”

Leung notes that the $29.2 million top line was better than his $24.4 million estimate, as was the $2.4 million in EBITDA better than his $1.8 million estimate. He notes that gross margins were 61 per cent, which was up from 58 per cent last quarter and 51.1 per cent the quarter before.

“Overall, we would characterize the fiscal Q2 results as being very positive, particularly as it relates to the top line outperformance,” says Leung in a client update on Friday. “Furthermore, with the full benefits of recent restructuring expected to materialize in H2 FY19, we believe the company is well positioned to complement this top line performance with healthy quarter-over-quarter margin expansion.”

Leung notes that the company did not update its fiscal 2019 revenue guidance, which was last reported at about $100 million, but the analyst says that there could be upside to this guidance upcoming with the company’s third quarter results.

Leung sees Sangoma generating EBITDA of $11.0 million in its fiscal 2019 on revenue of $107.7 million and EBITDA of $15.7 million in fiscal 2020 on a top line of $122.7 million. Leung is maintaining his “Buy” rating and $2.50 target price, which represents a projected return of 46 per cent at the time of publication.