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OpenText is still undervalued, National Bank Financial says

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opentext national bank National Bank Financial Markets analyst Richard Tse says there was nothing scary in the Halloween night first quarter results from OpenText (OpenText Stock Quote, Chart, News TSX,NASDAQ:OTEX).

The analyst reviewed the quarter in an update to clients on Thursday, saying his thesis remained unchanged after the Q1 results.

OpenText’s share price was up over two per cent in trading on Friday as the market reacted to the latest quarter from the Waterloo, Ontario-based Enterprise Information Management company. OTEX reported revenue of $706.6 million, up 5.9 per cent year-over-year, GAAP net income of $74.4 million, up 104.8 per cent year-over-year, and adjusted EBITDA of $354.2 million, up 3.2 per cent year-over-year. EPS came in at $0.64 per share. (All figures in US dollars.)

In his commentary, OpenText CEO Mark Barrenechea said that the Q1 top line was the highest first quarter revenue in the company’s history, while annual recurring revenue grew by 7.1 per cent year-over-year to $556.6 million.

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“The OpenText Cloud creates a modern platform for innovation and our leadership with the strongest Enterprise Information Management (EIM) offering in the industry positions OpenText to gain share in a shifting economic environment. With a durable business and high recurring revenues, we are tracking to our Fiscal 2020 target model,” wrote Barrenechea in the quarterly press release on Thursday.

Tse said unlike previous quarters where growth came relatively balanced from the company’s License, Cloud Services and Customer Support segments, the Q1 saw Cloud Services leading the way, up 14 per cent year-over-year and accounting for almost 98 per cent of total revenue growth in absolute dollars.

Overall, the numbers came pretty much in line with Tse’s estimates, which called for revenue of $697 million and adjusted EPS of $0.64 per share, while adjusted EBITDA margin of 36.5 per cent was a hair lower than his estimate of 37.6 per cent.

The analyst called OTEX a cash flow machine that has tonnes of capacity for acquisitions, as it posted CFO in the Q1 of $137 million and ended the quarter with about $1 billion in cash.

“With an expanded revolving credit facility (from $450 million to $700 million), we continue to see an estimated debt capacity of more than $1.8 billion – which does not include the potential capacity from a renewed shelf prospectus in the amount of $1.5 billion, which could imply OpenText has potentially large acquisition prospects in its pipeline for 2020. Bottom line, for an acquisition-focused name, we continue to see ample capacity for acquisitions given a current ~1.5x net leverage ratio,” writes Tse.

The analyst is maintaining his “Outperform” rating and $50 target price for OTEX, which translated to an estimated total return of 26 per cent at press time.

Tse says that he continues to see relative value in the name along with compelling defensive attributes.

“Having recently attended OpenText’s Investor Day, nothing in the Q1 results changes our current thesis – we continue to see an attractively valued name with optionality from a number of initiatives that have the potential to drive an acceleration in what’s historically been elusive organic growth – all when the acquisition environment appears to be improving from a valuation standpoint based on Management’s conference call commentary,” writes Tse.

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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