OpenText is an attractive takeout target, this fund manager says

Top shelf names in Canadian tech are a small bunch — you’ve got longtime stalwarts like CGI Group, Descartes Systems and Constellation Software along with more recent success stories like Shopify and Lightspeed POS. Then there’s growth by acquisition story OpenText (OpenText Stock Quote, Chart, News TSX:OTEX), which while many not the flashiest operation in town is one that you want to have in your portfolio over the long haul.

So says Andrey Omelchak of LionGuard Capital, who thinks the enterprise information management company could make for an attractive acquisition itself for the right buyer.

“I believe that it’s a solid long-term hold,” said Omelchak, president and CIO of LionGuard Capital Management, speaking to BNN Bloomberg on Tuesday.

“I don’t necessarily see a breakout from the current valuation levels. It’s a bit difficult to call at this point, but what I can tell you is that it hasn’t really participated alongside a number of other tech companies, so the valuation level is interesting,” he said.

Waterloo, Ontario’s OpenText has had by all accounts a great 2019, with its share price now up 30 per cent year-to-date. The pace of growth for the stock has been more or less consistent over the past five years, during which OTEX has appreciated 73 per cent —and that’s while paying a dividend which currently yields 1.6 per cent.

OpenText has made a habit of going on spending sprees, acquiring companies and then taking the time to integrate them into the company’s operations. Last month, OTEX announced a $1.42-billion deal for Boston-based cybersecurity firm Carbonite, which covers endpoint security and data protection for small- to medium-sized business.

Omelchak thinks there’s value to be gained with the right acquisition strategy, and OpenText stands as a potentially attractive target itself.

“I wouldn’t be surprised is OpenText was acquired by another company at one point or another. There are tremendous optimization benefits when you make an acquisition, especially in the IT space, and there will definitely be strategic buys for a company like OpenText out there which can extract a lot of synergies in the process,” Omelchak said.

OpenText last reported its earnings in late October where its fiscal first quarter 2020 showed total revenues up 5.9 per cent to $706.6 million, the highest first quarter revenues in the company’s history, with annual recurring revenues making up $556.6-million of the total, up 7.1 per cent from a year earlier. OTEX saw its adjusted EBITDA also climb from $246 million for Q1 of 2019 to $254 million, a 3.2 per cent rise. (All figures in US dollars.)

CEO and CTO Mark J. Barrenechea said that the top line growth was driven by the company’s Cloud Services and Subscriptions revenues, which were up 15 per cent from a year earlier.

“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,” said Barrenechea in a press release.