Alithya Group downgraded at Echelon Wealth Partners

Recent acquisitions may make for a brighter future for Alithya Group (Alithya Group Stock Quote, Chart, News TSX:ALYA) but the company’s top line still looks shaky, says Echelon Wealth Partners analyst Amr Ezzat, who reviewed ALYA’s latest quarterly results in an update to clients Friday.

Montreal-based digital technology consulting firm Alithya released its fiscal fourth quarter 2020 results on Friday fro the period ended March 31, 2020. The company reported Q4 revenues up 0.7 per cent year-over-year to $73.2 million and full-year revenue up 33.2 per cent to $279.0 million. Adjusted EBITDA for the quarter was down 9.6 per cent year-over-year to $2.0 million but up 90.1 per cent for the year to $11.8 million.

In his quarterly comments, Alithya president and CEO Paul Raymond said the COVID-19 crisis has so far had limited impact on the company’s business as most of its customers operate as essential services in their respective jurisdictions but that results over the next few quarters could see a greater impact.

“From April to mid-June, we observed a longer sales cycle as well as delays in some projects, albeit most clients remained committed to their projects long term,” Raymond said in a press release. “Going forward, we will remain focused on the execution of our strategic plan which is to increase our scale through acquisitions and organic growth, including developing new markets, diversifying our customer base and expanding our higher value-added service offerings.”

The quarterly revenue of $73.2 million ended up beating Ezzat’s forecast of $72.5 million, while the adjusted EBITDA of $2.0 million was notably below his estimate of $4.7 million, with the analyst pointing out the drop in gross margin from 29.3 per cent for last year to 28.6 per cent.

Ezzat concluded the Q4 results did little to change his view on the stock, which he now rates as a “Hold” (previously a “Buy”).

“The Company’s results continue to reflect top line headwinds caused by major customers in Canada as well as weakness in the Company’s legacy Oracle business (part of the Edgewater acquisition),” Ezzat wrote.

“Regrettably, the Company isn’t out of the woods yet and we expect more weakness over the upcoming quarters. We are adjusting our forecasts to reflect a more tamed growth outlook. While a more aggressive return potential is possible beyond our 12-month target, we expect the Company’s shares to be range bound over the next few quarters, with solid execution needed to resurface value,” he said.

A bright spot for ALYA has been its M&A strategy, according to Ezzat, with three acquisitions since early last October: Montreal-based software quality assurance company Askida, Montreal-based IoT and AI specialist Matricis Informatique and Dallas-based Oracle cloud specialist Travercent.

By the analyst’s estimate, the company has paid about $47.0 million in cash and stock for about $35.0 million in revenue and about $7.0 million in EBITDA, implying acquisition multiples of 1.3x sales and 6.7x EBITDA.

Ezzat’s “Hold” comes with a new target of $2.75 per share, down from $4.75 and representing at press time a projected return of 10.0 per cent