There’s still more upside to OpenText, says National Bank

Annual recurring revenue continues to drive value for OpenText (OpenText Stock Quote, Chart TSX, NASDAQ:OTEX), according to analyst Richard Tse of National Bank Financial, who after the company’s third quarter results is sticking with his “Outperform” rating and $50.00 target.

Waterloo, Ontario’s OpenText reported its fiscal Q3 ended March 31, 2019, on Wednesday, coming in with revenue of $719 million, up five per cent year-over-year, and adjusted EBITDA of $261.8 million, up from $227.6 million a year prior. (All figures in US dollars.)

“We had solid business execution during the quarter, with a focus on growing margins and cash flows,” said Madhu Ranganathan, OpenText EVP and CFO, in a press release. “We generated operating cash flows of $286 million, an increase of 6% from the prior year, while integrating two acquisitions during the quarter. The results reflect continued strength of our operational focus.”

Tse says the quarterly results were in-line with his and consensus estimates, while at the same time the analyst praised the company’s cash from operations which was $286 million, up 5.7 per cent year-over-year and up 40 per cent year-over-year on a trailing twelve month basis. As well, Tse likes the trend towards organic growth that OTEX is displaying, with now eight quarters of positive organic growth and approximately one per cent year-over-year organic growth in the Q3.

“Bottom line, everything we saw and heard continues to support our investment thesis that has acquisitions continuing to drive growth with optionality on organic growth,” says Tse in a research update on Wednesday. “And with ~$1.5 billion of available capital capacity (and net leverage ratio of 1.7x), we see OpenText continuing to execute on acquisitions as we look ahead to fiscal 2020 (June).”

As a result, Tse has upped his forecasts, now calling for fiscal 2019 sales of $2.895 billion (previously $2.888 billion) and 2019 adjusted EBITDA of $1.082 billion (previously $1.069 billion).

Tse’s target of $50.00 is based on his DCF model which implies an EV/Sales multiple of 5.3x and EV/EBITDA of 14.2x based on his fiscal 2019 estimates. The target represents a projected return of 32 per cent at the time of publication.