Sangoma Technologies is solid during COVID, says PI Financial

Sangoma Technologies (Sangoma Technologies Stock Quote, Chart, News TSXV:STC) has had a remarkable run over the past few months but PI Financial analyst David Kwan thinks there’s more upside to the tech stock.

In a corporate update on Monday, Kwan reiterated his “Buy” rating but pushed up his target price from $3.00 to $4.00, saying Sangoma’s share price performance still lags its industry peers.

Markham, Ontario-based Sangoma is a global provider of on-premise and cloud-based Unified Communications (UC) solutions for small and medium-sized businesses and enterprise customers in over 150 countries.

The company has seen its share price rocket upwards in recent weeks, altogether climbing from a low of $1.08 per share in mid-March to now $2.80, as the market continues to favour the company during the COVID-19 pandemic. The stock is now trading at all-time highs.

Kwan called the share price appreciation a positive for the stock, arguing that further upside remains, as STC is still trading at a significant discount to its peers. The analyst estimates its sector peers at 11.9x EV/EBITDA on calendar 2021 estimates and 6.2x 2021 EV/Sales whereas Sangoma is currently at 9.8x and 1.8x, respectively.

For further perspective, Kwan said STC is now up 12 per cent for the year whereas its industry comparables are on average up almost 30 per cent.

The analyst said demand for STC’s products has remained solid through the pandemic, with STC’s communications and collaboration solutions helping customers to work effectively and efficiently on a remote basis.

“A large recurring revenue base and the need for quality communications platforms has helped STC weather COVID-19 very well,” said Kwan. “Recurring Service revenue hit +50 per cent of total revenue for the first time last quarter (52 per cent in Q3 FY20). The strong growth has been aided by an active and very successful M&A strategy with the acquisitions of Digium and VoIP in particular helping drive the significant increase in Services revenue mix.”

On the acquisition front, Kwan said STC should continue to be active, with the integration of its last acquisition, VoIP Innovations, made in October of last year, currently going well and helping to lift STC’s margins to near record levels. Further M&A should serve as a major near-term catalyst, Kwan said.

At press time, Kwan’s new $4.00 target reflected a projected 12-month return of 42.9 per cent.

“The increase to our target price multiple, which is in-line with the peer group average, reflects an increased confidence in our forecasts and Management’s ability to deliver strong results amidst the pandemic along with an improvement in peer group valuations.

As a reminder, despite STC’s active M&A strategy (and our belief that STC will announce a material acquisition by year-end), we do not include the impact of future acquisitions in our forecasts or valuation, which could provide additional upside,” Kwan wrote.

Sangoma last reported earnings on May 25, 2020, where its fiscal third quarter featuring sales up 26 per cent to $36.3 million and EBITDA up 100 per cent to $6.5 million.