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Constellation Software is fully valued: National Bank Financial

National Bank

Constellation Software A new strategic acquisition by Constellation Software (Constellation Software Stock Quote, Chart, News TSX:CSU) merits praise from National Bank Financial’s Richard Tse but it’s not enough to move the needle on the stock.

In an update to clients Wednesday, Tse reiterated his “Sector Perform” rating and C$1,400.00 target price, which at press time represented a 12-month return of negative six per cent.

Shares of Constellation rose on Wednesday with news that its TSS operating group and its subsidiary TPCS Holding BV had entered into a binding agreement with IJssel BV to purchase 100 per cent of the shares of Topicus.com BV, a Netherlands-based diversified vertical market software provider.

By the deal, Constellation aims to join TSS and Topicus under the operating group Topicus.com which will then, if all goes to plan, be publicly listed, leaving Constellation and its shareholders as a “significant shareholder” of Topicus.com.

On the deal, Mark Leonard, President of Constellation, said in the press release, “I cannot think of another vertical market software company that has achieved Topicus’ size without using outside shareholder funding. I look forward to spending more time with the Topicus founders as travel becomes easier. I’m an old dog, but I’m certain that they have new tricks to teach me. More importantly, they have experience and practices that can benefit all of the Constellation operating groups.”

Constellation Software

On the details, Tse noted that Topicus’ 2019 annual gross revenues were about $110 million with total tangible assets as of the end of 2019 of about $7.7 million. Tse estimated the acquisition price at between $250 and $350 million. (All figures in US dollars unless where noted otherwise.)

The analyst judged the move as a positive one for CSU, which has lagged a bit in terms of its habitual capital deployment so far in 2020.

“In our most recent published note, we estimate Constellation needed to deploy $750 million to maintain a growth rate in the mid-teens and as of the last reported quarter it had deployed US $155 million. This obviously gets them closer to our estimate (even after backing out the TSS Membership Liability). Furthermore, we think the joint scale in the new operating group will provide critical mass to Constellation as a whole not just from a capital standpoint but to scaling best practices where Europe has been a growing proportion of Constellation’s revenue (one-third),” Tse said.

On Constellation’s plan to take the separate operating group public sometime in the future, Tse said, “The read-through is this: through various Constellation Annual General Meetings, the idea has been raised of spinning off divisions to surface more value through autonomy. In our opinion, this new separate entity could provide a path to test how that could potentially work and/or be received. Moreover, it’s a potential negotiating tool for prospective acquisitions going forward.”

“Bottom line, we like CSU based on its recurring revenue stream (defensive) with potential opportunities coming for acquisitions but we believe the risk-to-reward profile is balanced,” Tse wrote.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.

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