OpenText has “considerable” untapped value, National Bank Financial says

New quarterly results from OpenText (OpenText Stock Quote, Chart, News TSX:OTEX) were a clean beat, in the words of National Bank analyst Richard Tse, who reviewed the company’s fiscal second quarter in an update to clients on Thursday. Tse raised his price target on OTEX, saying that the company and stock remain an undervalued acquisition growth story.

OpenText, a Waterloo, Ontario-headquartered enterprise information management business, released its Q2 2020 results on Thursday, showing revenue up 4.9 per cent year-over-year to $771.6 million, with the company’s Cloud Services and Subscriptions segment leading the way with 13.3 per cent growth to $248.3 million. (All figures in US dollars.)

An habitual acquirer, OTEX’s latest splash was the $1.42-billion purchase in December of Boston-based software security company Carbonite, which should help propel OpenText forward, according to CEO Mark J. Barrenechea.

“With the addition of Carbonite, we have a strategic market-opportunity to bring Information Management (IM) to all sizes of customers, from the largest of enterprises, governments, mid-size companies, small companies, and consumers,” said Barrenechea, in the second quarter press release.

“We are a partner-oriented company with the talent and culture to make an SMB channel wildly successful. With Carbonite this partner opportunity gets significantly stronger and deeper as we leverage OpenText’s proven expertise and successful track record of building powerful global partner programs,” he said.

OpenText’s Q2 numbers came in ahead of expectations, with the $772-million top line handily beating both the consensus estimate of $756 million and Tse’s $762 million. Adjusted EBITDA margins of 41.1 per cent were better than the Street’s and Tse’s 40.5 per cent estimate and adjusted EPS of $0.84 per share was better than the consensus average of $0.79 per share and Tse’s $0.78 per share.

“OpenText’s FQ2 results came in solidly ahead of expectations – both ours and consensus,” said Tse in his report. “While this remains largely an acquisition growth story, organic growth was positive (~2 per cent by our estimate) for the second consecutive quarter in a row. That’s important because we believe organic growth represents option value that’s not priced in this name and with a number of initiatives underway (doubling the G10K coverage and expanding the adoption rate of products), we think there’s considerable untapped value on the horizon.”

Tse says the Carbonite addition along with OpenText’s highlighting its Cloud segment as a core focus in its hybrid strategy should together drive an upward valuation re-rating of the stock. And while management said that there will be costs attached to integrating Carbonite, to the tune of $26-34 million with an estimated completion by the end of fiscal 2021, the impact of the development on OTEX’s fiscal 2020 should be neutral, with cost savings being offset by integration costs.

“Investors following our research will know it remains one of our favourite “legacy” names. We continue to see relative value with some compelling defensive attributes. We see a growing base of recurring revenue through acquisitions, expanding operating leverage and optionality from organic growth,” Tse wrote.

With the client update, Tse has reaffirmed his “Outperform” stock rating and raised his target from $50.00 to $55.00, representing a projected return of 20 per cent at press time.