Canada should outperform in 2020.
That’s the message from a Stifel Canada equity research report delivered on Tuesday which zeroes in on a number of Canadian tech companies as its Top Picks for the year ahead.
Canadian stocks once again underperformed compared to their American peers in 2019, with the S&P 500 returning 31.5 per cent versus the S&P/TSX at 29.0 per cent. But that trend should turn around in 2020, according to Stifel analysts who say soft Canadian economic data in late 2019 could lead to Bank of Canada interest rate cuts in 2020, which would likely push the dollar down but improve Canadian exports to the US.
“With growth stocks increasingly expensive compared to value stocks, we see potential for a rebound in value stock performance this year – financials and resources – which should boost relative performance in Canada. Finally, with a slew of energy infrastructure projects reaching completion between now and 2022, we see Canada’s beleaguered energy sector as offering strong potential for a rebound this year,” Stifel analysts wrote.
Considering technology, however, Stifel says strong returns in 2019 for Canadian tech —the TSX IT Index was up 63 per cent last year and returned a ten-year high valuation of 22.5x NTM EV/EBITDA— don’t bode particularly well for 2020, where more modest gains are expected along with high valuation risk.
Stifel analyst Deepak Kaushal said among high valuation tech companies he prefers defensive names such as CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A), which he rates as a “Buy” with a $110.00 price target, implying a projected return of one per cent, Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News TSX:DSG), which gets a “Buy” and $63.00 target, implying a return of 11 per cent, and Enghouse Systems (Enghouse Systems Stock Quote, Chart, News TSX:ENGH), which Kaushal also calls a “Buy” with a $55.00 target, implying a return of nine per cent.
With the new report, Stifel analyst Justin Keywood has also maintained his assertion that manufacturing automation company ATS Automation Tooling Systems (ATS Automation Tooling Systems Stock Quote, Chart, News TSX:ATA) deserves a “Best Ideas” rating due to a strong secular trend in automation combined with ATS’ exposure to valuable areas such as healthcare and soon-to-be food and beverage.
Keywood rates ATS a “Buy” with a $28.00 target, implying a return of 29 per cent at press time.
Kaushal has two Top Picks in tech, starting with Toronto-based real estate software company Altus Group (Altus Group Stock Quote, Chart, News TSX:AIF), which the analyst rates as a “Buy” with a $46.00 target, which at press time represented a 12-month projected return of 20 per cent.
Kaushal wrote that Altus generates 50 per cent of its EBITDA from its Analytics business, which he expects will double by 2023 and outpace its Commercial Real Estate consulting business. Moreover, the analyst thinks that Altus is currently trading at a discount to its closest peers, saying,
“While 2020 EV/EBITDA and EV/Sales of 16x and 2.6x appear fair versus a broad peer group at 15x and 3.6x, respectively, a group of real estate software and data analytics companies trade higher at 17.9x and 5.0x,” Kaushal writes.
Montreal-based supply chain solutions company Tecsys (Tecsys Stock Quote, Chart, News TSX:TCS) also got the nod from Kaushal who noted that the company is in mid-transition to subscription licensing from perpetual licensing, which has resulted in understated growth and margin despite significant rebounds in Tecsys’ key target markets in healthcare and complex distribution.
“Tecsys appears expensive at 32x 2020 EV/EBITDA versus peers at 17x. However, on an EV/Sales basis, Tecsys trades at 2.8x, well below software peers averaging 5-7x. We believe valuation will re-rate higher as growth and margins normalize as the transition matures,” Kaushal wrote.
The analyst gives Tecsys a “Buy” rating and $26.00 target, which at press time represented a projected return of 21 per cent.