Sangoma Technologies earns price target raise at PI

Sangoma Technologies (TSXV:STC) has been a winner of a stock in 2019 but there’s more where that came from, according to PI Financial analyst David Kwan, who in a client report on November 15 upped his target price after reviewing the company’s quarterly numbers.

Sangoma, which provides Unified Communications services for SMBs, Enterprises, OEMs, carriers and service providers, reported its first quarter fiscal 2020 results last Thursday, featuring quarterly revenue up 31 per cent year-over-year to $28.0 million, a record for the company’s Q1 revenue. Net earnings per fully diluted share were $0.013 compared to a loss of $0.019 during Q1 of fiscal 2019.

In his comments, president and CEO Bill Wignall said that the quarter represented the 19th straight where revenue was up year-over-year.

“During our first quarter we had a successful, over-subscribed equity raise, to set the scene for the acquisition of VoIP Innovations, LLC (“VI”) during October. The accompanying debt financing also went well, with the transaction subsequently closing just after the end of our first quarter, and the first few of weeks of transition has gone smoothly,” wrote Wignall.

The $28.0-million top line was above Kwan’s forecast for $27.3 million and in line with the consensus opinion, while adjusted EBITDA of $3.7 million —a 46 per cent increase year-over-year— was also above Kwan’s estimate of $2.9 million and the Street’s $3.0 million.

Drilling down, Kwan noted that Sangoma’s strong free cash flow generation continued over the quarter at $2.5 million. Over the trailing 12 months, STC has generated $11.4 million in free cash flow. The analyst says that the company’s balance sheet has been bolstered by the recent equity raise which raised about $23 million this past July.

Kwan said along with the VI integration, Sangoma is intending to add a few bodies particularly in product development to strengthen its core SIP trunking as well as its newer CPaaS offerings.

While management reiterated its fiscal 2020 guidance which calls for revenue between $135 and $143 million and adjusted EBITDA between $19 and $20 million, Kwan thinks there could be a positive revision in store.

Overall, the analyst took the quarterly results as a positive.

“STC continues to execute very well on its aggressive growth plan that has helped it generate superior returns for shareholders. We expect this exceptional performance to continue as the VI acquisition bolsters STC’s growth and profitability with future acquisitions and solid organic growth adding more fuel to the fire. Even with the stock’s 75 per cent year-to-date return, we believe the share price is attractively valued on both a relative and absolute basis,” Kwan said.

The analyst is leaving his forecasts relatively unchanged, calling for fiscal 2020 revenue and adjusted EBITDA of $136.0 million and $20.1 million, respectively, and for fiscal 2021 revenue and adjusted EBITDA of $150.2 million and $23.9 million, respectively.

Kwan is reiterating his “Buy” recommendation and raising his target from $2.70 to $2.85, based on a 9.0x multiple of his fiscal 2021 adjusted EBITDA estimate (previously his calendar 2020 estimate).

The new target represented a projected return of 39.0 per cent at press time.