Enghouse is a Canadian tech stock worth buying, fund manager says

The job of the serial tech acquirer is to not only find value in struggling companies but to keep boosting your top and bottom lines with each new purchase. And one company that’s been having great success at it lately is Enghouse Systems (Enghouse Systems  Stock Quote, Chart, News TSX:ENGH), which according to portfolio manager James Telfser is a smart pickup for investors searching for a good growth name in Canadian technology.

Markham, Ontario’s Enghouse is an enterprise software and services business with an asset management segment focused on growth through both acquisitions and organically. This year has seen Enghouse make a few notable purchases, including New Jersey-based video software company Vidyo, Ottawa-based Espial Group and AI for customer engagement software company Eptica S.A.

Telfser, managing partner for Aventine Asset Management, singles out the Espial buy as an example of solid work by Enghouse to build on the company’s strengths. The $56.5-million deal earlier this spring came about after Espial had a rough year both in terms of share price and concerning the video streaming company’s transition into a SaaS-based model.

But being folded into the larger Enghouse has benefited Espial, according to Telfser.

“[Enghouse] is one of the three main software consolidators in Canada,” says Telfser, speaking to BNN Bloomberg last Thursday. “I’ve been more negative on them than some of the other companies but through their last quarter I was actually quite impressed with what they’ve been able to do with that business that they bought, Espial. When you looked at in on paper, you said, ‘Holy cow, that was a business that was really struggling.’ They’ve done a really good job of turning it around, which really speaks of this management team.”

Enghouse last reported its earnings in mid-September where revenue was up 16.8 per cent to $101.3 million, with much of those gains coming from recent acquisitions. Adjusted EBITDA was up slightly from a year earlier to $28.1 million or $0.51 per diluted share. Enghouse finished its fiscal third quarter 2019 with $141.3 million in cash, cash equivalents and short-term investments as compared to $193.9 million a year earlier.

Enghouse has been a productive stock in recent years. In 2018, a year in which the majority of Canadian tech companies lost ground, Enghouse ended up eight per cent. So far in 2019, ENGH is up 17 per cent.

The company also pays a dividend — a small one at a current yield of 1.1 per cent but a rarity in the tech field and one which Enghouse has consistently added to over the years.

Telfser says that while Enghouse is looking better, it’s still not his favourite Canadian tech acquisition story.

“Enghouse has created a lot of value for shareholders,” says Telfser. “I’d buy Descartes Systems Group over Enghouse but I think it’s worthy of holding if you want to hold a bunch of consolidators.”

“These companies, they’re able to buy software companies that are slowing or declining and bring them into their platform, grow the margin and turn around sales and they sort of do that over and over again at various sizes,” he says.