Calian Group is still a buy, says Echelon analyst Amr Ezzat

Arguing the market has consistently underestimated tech services company Calian Group (Calian Group Stock Quote, Chart, News TSX:CGY), Echelon Capital Markets analyst Amr Ezzat relaunched coverage of the stock on Monday with a “Buy” rating and $74.00 target price.

“Calian is a quality diversified operation with a deep bench, an under-leveraged balance sheet, and a solid track record of value creation through acquisition and innovation,” Ezzat wrote in his report. “The Company has all the bells and whistles an investor would seek out in a quality company. The stock has tripled in the last three years, as management transitioned its philosophy and growth strategy from what was a “steady Eddie” operator with stable revenues/earnings, to one seeking to capitalize on growth in a
more aggressive fashion.”

Prime to Ezzat’s investment thesis is his estimation of the accretion potential of Calian’s M&A activity on its earnings and valuation.

“We believe using an EBITDA/earnings multiple on short-term earnings estimates significantly (and incorrectly) undervalues Calian’s shares as it gives no recognition to the Company’s inorganic growth activity (and indeed, its under-leveraged balance sheet).

Case in point, at the date of writing, the Street has CGY growing top line by 3.4 per cent and 1.7 per cent in F2021 and F2022, respectively, versus F2020’s YTD 24.7 per cent growth and F2019’s 12.4 per cent. So how would ‘slapping’ a multiple on short-term earnings ever yield a correct ‘fair value’?” Ezzat wrote.

Ottawa-based Calian has four business segments: Advanced Technologies, Health, Learning and Information Technology, with almost half of its earnings generated in Advanced Technologies via sales of a new custom telecommunications product for a Tier 1 North American mobile operator and a large deployment of radio frequency satellite ground systems.

Government clients make up a majority of its business for the other three segments, with repeat business and contract renewals being the norm for Calian. Ezzat pointed out that the company’s current backlog sits at near record levels at $1.313 billion.

On the M&A front, Ezzat figures Calian has between $160 and $180 million of dry powder without tapping other sources of financing. Ezzat said Calian has become more aggressive in its activity in recent years, having committed over $60 million to acquisitions since mid-2018.

“Management has a good track record of value creation through acquisitions and has been methodical in acquiring companies at or below their trading multiples on a pre-synergies basis. Namely, the Company completed 12 acquisitions in the last 10 years but has been more active in the latter years (both in terms of number of transactions and size of acquisitions). We believe Calian’s scope of potential acquisitions extends from technology-focused to client-focused acquisitions with the goal of diversifying its revenue base both between and within each of its four operating segments,” Ezzat wrote.

Looking ahead, the analyst thinks Calian will deliver fiscal 2020 (year end September 30) revenue and EBITDA of $422.2 million and $38.2 million, respectively, and fiscal 2021 revenue and EBITDA of $438.9 million and $43.1 million, respectively.

At press time, Ezzat’s $74.00 target represented a projected return of 25.1 per cent.