A very solid quarter that beat estimates is cause for a price target raise on Computer Modelling Group (Computer Modelling Group Stock Quote, Chart, News TSX:CMG), according to Industrial Alliance analyst Elias Foscolos, who reviewed the company’s Q2 in a research update to clients on Thursday.
Calgary-based CMG was up sharply in trading on Wednesday on the software engineering and consulting firm’s fiscal second quarter 2020 earnings, which featured revenue of $19.9 million, up 11 per cent year-over-year.
“We continue pursuing our goal of increasing software license sales, particularly internationally, with the support of various R&D initiatives (such as our public cloud offering, CoFlow development, product feature and functionality enhancements), while exercising fiscal prudence,” wrote management in a press release.
CMG ended the quarter with a strong balance sheet, no borrowings and $47.1 million in cash, achieving free cash flow of $0.09 per share over the Q2. CMG declared a quarterly dividend of $0.10 per share subsequent to quarter’s end.
Foscolos says the company’s dividend (currently a five per cent yield) is likely safe.
“CMG’s Q2/F20 results exceeded our expectations, achieving 9 per cent year-over-year growth in core software revenue with minimal noise from Prior Period recognition and Perpetual licenses. We have increased our revenue outlook for the Company, which is supported by growth in deferred revenue and potential price increases to take effect in the New Year. With our updated outlook and CMG’s significant cash balance, we do not see a risk of a dividend reduction,” Foscolos writes.
On the quarterly numbers, Foscolos says that the $19.9-million top line beat his $19.2-million estimate, with $16.1 million coming from the company’s core Maintenance/Annuity software revenue. Non-core revenues were flat and not material contributors to the quarter, while Professional Services revenue at $2.4 million (up 42 per cent year-over-year) was better than he had expected.
On earnings, Foscolos estimates CMG’s quarter at adjusted EBITDA of $10.2 million, which was better than his $8.8-million estimate.
The analyst also focused on CMG’s deferred revenue, which stood at $24 million at the quarter’s end, a three-per-cent year-over-year increase.
Foscolos writes, “CMG’s deferred revenue is a reliable indicator of Maintenance/Annuity revenue to be recognized over the next twelve months as licenses amortize. Therefore, the year-over-year increase in this item is positive for our outlook, indicating that CMG will realize greater use of its software in the near-term. We anticipate price increases will also begin to take effect in the New Year (CMG’s FQ4).”
Revising his estimates, Foscolos is now calling for fiscal 2020 revenue of $78 million (previously $76 million) and OIBDA of $36 million (previously $33 million) and for fiscal 2021 revenue of $80 million (previously $78 million) and OIBDA of $37 million (previously $34 million).
The analyst is maintaining his “Buy” recommendation, while on valuation, he uses a 23x EV/OI multiple of his fiscal 2021 estimates (resulting in $9.90 per share) coupled with a DCF valuation of $7.80 per share to arrive at his new price target of $8.75 per share (up from $7.75 per share).
The new price target on Computer Modelling Group represented a projected 12-month return including dividend of 14 per cent at the time of publication.