Constellation Software’s stock is fully valued: National Bank

Following Q2 results that came in below expectations, National Bank Financial analyst Richard Tse is maintaining his “Sector Perform” rating on Constellation Software (Constellation Software Stock Quote, News, Chart TSX:CSU).

On August 2, CSU posted its Q2, 2019 results. The company earned (USD) $73-million on revenue of $856-million, a topline that was up 12 per cent over the $752-million the company posted in the same period last year.

Tse notes that Constellation’s second quarter results came in below both his and the street’s expectations. The analyst says the growth may finally be slowing for one of the best performing Canadian tech names ever.

“While there’s still half a year left, at this point, it appears the pace of capital deployment is lagging what’s required to maintain our forecast; as such, we’re tempering our expectations for the year,” Tse says. “Year to date (Q2), Constellation has deployed $181 mln or ~25% of the $700 mln we estimate the Company needs to deploy to maintain our growth expectations. That said, Constellation has entered into agreements for a total amount of $221 mln which suggests the Company could be in a position to accelerate the pace of deployment in H2. We believe the ability to deploy capital to generate returns at former rates has become more challenging. No doubt, some of the Company’s own actions would appear to corroborate that – lower hurdle rates, special dividend, etc. While we believe this is one of the best run companies in our coverage universe, it’s priced for that when the outlook for their prime growth driver (acquisitions) is less robust than its former years.”

Constellation Software Stock a “Sector Perform” at National Bank Financial

In a research update to clients today, Tse maintained his “Sector Perform” rating and one-year price target of (C) $1200 on Constellation Software’s stock, implying a return of negative five per cent at the time of publication.

Tse thinks CSU will post EBITDA of (USD) $966-million on revenue of $3.49-billion in fiscal 2019. He expects those numbers will improve to EBITDA of $1.12-billion on revenue of $3.99-billion the following year.

“We maintain our Sector Perform rating on CSU,” the analyst adds. “We think the stock is reasonably valued on our forward outlook even though measures (like expanding the acquisition team and a lower hurdle rate) have the potential to increase capital deployment – the reality is that potential is a necessity given the growing size of the revenue base. We maintain our CAD$1,200 target which implies 20.3x EV/EBITDA based on our revised F2019 estimates (was 20.8x).”

The acquisitions have kept on coming for Constellation Software this summer.

On July 17, its wholly-owned Volaris Group acquired MDS Global Ltd., A European company that provided software to telco, primarily in Great Britain.

Then, on August 1, Constellation reported that its Total Specific Solutions division completed the acquisition of Salvia Développement SAS, a software solutions provider from France that is focused partly on the real estate vertical.

Shares of Constellation Software closed today down 0.4 per cent to $1258.02. The stock closed 2018 at $873.86.