Canadian software stock Tecsys is undervalued: Echelon

Is Tecsys stock undervalued? Echelon Wealth Partners analyst Amr Ezzat likes what he sees from supply chain management software company Tecsys (Tecsys Stock Quote, Chart, News TSX:TCS), which delivered better than expected results in its latest quarter.

In an update to clients on September 5, Ezzat reviewed Tecsys’ fiscal first quarter 2020, maintaining his “Buy” rating and $17.00 target, which represented a projected return of 22.1 per cent at the time of publication.

Montreal-based Tecsys, which offers supply chain management software to corporations to help manage their warehouse facilities, distribution networks and logistics, delivered its Q1 on September 5, registering cloud maintenance and subscription revenue up 40 per cent year-over-year to $9.8 million for total revenue of $24.3 million, itself up 49 per cent from the year prior.

“The first quarter of fiscal 2020 represented a continuation of the core strategic focus for Tecsys,” said Peter Brereton , President and CEO, in their quarterly press release. “We continue to transform our revenue base as we move to SaaS revenues and are seeing growth in our pipeline of business larger than that at any time in our history. We are particularly pleased with the robust growth in our professional services business where several quarters of strong bookings are now flowing through into revenue.”

The quarterly revenue of $24.3 million was ahead of the consensus expectation of $23.1 million and Ezzat’s estimate of $23.2 million, while Tecsys’ adjusted EBITDA of $2.0 million, itself up from $0.5 million a year prior, was noticeably better than both the Street’s and Ezzat’s forecast of $0.6 million.

Tecsys stock still undervalued, analyst says…

Looking into the numbers, Ezzat pointed out that Tecsys’ top line dynamics were similar to that of the last couple of quarters, where revenue from its Proprietary Products segment were down, this time by 66.5 per cent year-over-year, as the company continues its transition to a SaaS model. Recurring Revenues, including cloud, maintenance and subscription, were up 39.9 per cent year-over-year with nine per cent coming from organic growth.

Ezzat said Tecsys’ good cost control contributed to the stronger EBITDA.

“Operationally the Company continues to showcase very strong momentum showcasing robust professional services bookings and Annual Recurring Revenue (“ARR”) growth. We remain fans of the acquisitions of PCSYS and OrderDynamics. Both are sound strategic moves that greatly enhance TECSYS’ addressable market and growth profile going forward,” writes Ezzat.

“We believe a much more aggressive return profile is possible beyond our 12-month target price should the Company successfully complete its transition to SaaS,” he says.

Ezzat commented on Tecsys’ acquisition of cloud-based order management software OrderDynamics, announced on November 14, 2018, a pickup which is expected to deliver $7 million in revenues and 30 per cent year-over-year growth.

“Beyond the financials and the standalone high growth of the platform, we think the acquisition is a sound strategic move in that it also adds a critical piece to TECSYS’ solutions suite and ultimately will help the Company enhance the growth profile of its core complex distribution vertical. Namely, potential clients are increasingly requesting a distributed order management (DOM) system and dynamic e-fulfillment capabilities, something TECSYS didn’t have in its Supply Chain Management suite,” writes Ezzat.

Looking ahead, the analyst is forecasting fiscal 2020 (fiscal year end April 30) revenue and EBITDA of $96.8 million and $4.9 million, respectively, and fiscal 2021 revenue and EBITDA of $103.9 million and $10.4 million, respectively.