A weaker outlook for oil and gas fundamentals are cause for a less rosy picture for Computer Modelling Group (Computer Modelling Group Stock Quote, Chart, News TSX:CMG), but the stock is still a Buy, although a Speculative one now, according to Industrial Alliance Securities analyst Elias Foscolos, who delivered a research update on CMG on Thursday.
Calgary-based CMG is a software and consulting company to the oil and gas sector that develops and licenses dynamic reservoir modelling and simulation software, with the majority of the company’s sales coming from outside of Canada.
Foscolos said the COVID-19 pandemic-induced economic slowdown has teamed up with a market share war between Saudi Arabia and Russia to push up the global supply and push down crude prices, a predicament which may last for a protracted period, according to Foscolos, and cause most of CMG’s clients to reduce spending.
At the same time, the analyst said that the hit might be lessened by the fact that most clients count CMG’s software as a recurring operating cost rather than a capital cost.
The analyst said that a dividend reduction could be in the cards, although not an immediate need, as the company has a cash balance. Reasons in favour of a dividend drop, according to Foscolos, include that it would better preserve the balance sheet and ensure survivability while also permitting CMG to re-implement an issuer bid and then return cash to shareholders in another manner should it so choose.
“We are reducing our estimates for CMG as weaker oil and gas industry fundamentals are likely to result in some licensing declines, partially offset by foreign exchange tailwinds. Based on our cash flow forecast, we believe a reduction of the dividend may be a prudent measure at this point,” Foscolos wrote.
“We have reduced our estimates, as well as our multiples to reflect more weighting to OFS peers. This results in our revised $6.00 target price. We are simultaneously lowering our recommendation to Speculative Buy (previously Buy), as we await the Company’s response to the current macro situation,” he wrote.
Foscolos’ new forecast sees CMG generating fiscal 2020 revenue and adjusted EBITDA of $75 million and $34 million, respectively, with declines in revenue for fiscal 2021 and 2022 of 19 per cent and 13 per cent respectively.
At press time, the analyst’s new $6.00 target (previously $7.75) represented a projected 12-month return of 43 per cent.
CMG last reported earnings on February 12, where its third quarter 2019 featured revenue up one per cent to $19.3 million and EBITDA down three per cent to $8.6 per cent. (For comparison, for the nine months ended December 31, 2019, CMG’s revenue was up seven per cent and EBITDA was up 22 per cent.)
Perpetual license revenue grew by 58 per cent over the quarter, while annuity/maintenance license revenue fell by four per cent. CMG ended the quarter with no debt and $36.8 million in cash, with management declaring a quarterly dividend of $0.10 per share on February 11.