Tecsys keeps “Buy” rating at Haywood

Haywood Capital analyst Daniel Rosenberg has trimmed his target for supply chain tech company Tecsys (Tecsys Stock Quote, Chart, News TSX:TCS) after a capital raise but the company’s prospects are nonetheless solid.

In an update to clients on Wednesday, Rosenberg reaffirmed his “Buy” rating with the new price target of $23.00 (was $24.00), implying at press time a projected 12-month return of 30 per cent.

Montreal-headquartered Tecsys announced on Tuesday a bought deal financing round for about 1.16 million common shares at a price of $17.25 per share for gross proceeds of about $20 million. The raise comes with an over-allotment option of $3 million for a potential total of $23 million.

“This financing will support our profitable growth as we execute on our robust and growing backlog, which includes new projects which are being created and driven by the COVID-19 pandemic, supplying our healthcare and e-commerce clients,” said Peter Brereton, President and CEO, in a press release.

In his update, Rosenberg highlighted Tecsys’ strong balance sheet which as of last quarter had $11.9 million in cash and $11.1 million in debt, while the extra $20 million will give management plenty to work with for continued M&A activity.

The analyst said he likes the company’s recent purchases in Order Dynamics and PCSYS, both of which have
immediately increased revenue and broadened Tecsys’ product offering, geographic reach and addressable market.

Other notables for Rosenberg are Tecsys’ record backlog which hit $98.2 million by the end of last quarter, with strong growth prospects in both healthcare and complex distribution sectors, its history of generating positive cash flows and the bonus of being one of the few Canadian tech companies with a dividend.

“Through M&A Tecsys has opened new platforms for growth into Europe and in the retail vertical. With its market leading position in healthcare, TECSYS is well positioned to accelerate growth in the coming years. We expect the Company’s operations to perform well through the pandemic and we continue to like the long-term fundamentals of the Company,” Rosenberg wrote.

Valuation-wise, Rosenberg pegs Tecsys to be trading at 2.3x EV/Revenue which is below the Canadian Software average of 4.6x and equal to the Industry Group average of 2.3x.

On EV/EBITDA, Tecsys is trading at 19.6x versus the Canadian software average of 12.6x, according to Rosenberg.

Rosenberg’s forecasts remain unchanged, calling for fiscal 2020 revenue and adjusted EBITDA of $103.5 million and $10.5 million, respectively, while his target has been trimmed due to the new share dilution.

On March 25, Tecsys management delivered an update on the company vis a vis the COVID-19 crisis, saying that business has and should continue to see minimal disruption from the pandemic, in part because Tecsys’ client base in critical infrastructure will be performing uninterrupted.

“While we anticipate a probable slowdown in professional services at some point, we are not seeing that yet. We are also seeing new projects entering the backlog which are being created and driven by the pandemic,” Brereton said.