TECSYS has even more upside, Echelon Wealth says

Ballooning organic growth and higher visibility revenues are signs that TECSYS (TECSYS Stock Quote, Chart, News TSX:TCS) deserves a rerating, says Echelon Capital Markets analyst Amr Ezzat, who reviewed the company’s latest quarterly results in an update to clients on Thursday.

Montreal-based Tecsys provides supply chain management (SCM) software solutions for managing warehouse facilities, distribution networks and logistics, particularly to the healthcare industry, high-volume distributors of discrete goods and third-party logistics providers.

The company announced its fiscal fourth quarter and full year 2020 financials on Wednesday, featuring revenue for the Q4 up 20 per cent higher year-over-year to $27.7 million and adjusted EBITDA of $2.0 million compared to $0.7 million a year earlier. For the full year, Tecsys saw revenue grow 37 per cent from 2019 to $104.9 million, while adjusted EBITDA grew from $2.8 million to $10.3 million.

In the quarterly press release, management said the company’s ability to execute has not been affected by the COVID-19 pandemic nor has there been any material adverse impact on the company’s operating results.

“Our transition from perpetual license revenues to SaaS which helps us to deliver a more robust, predictable recurring revenue stream accelerated through fiscal 2020,” wrote Mark Bentler, CFO, in the press release. “This pace of transition continues to exceed our own internal forecasts. In fiscal 2020, SaaS subscription bookings comprised approximately 77 per cent of our software product bookings compared to 33 per cent in fiscal 2019.  Even adjusting for the currency tailwind we enjoyed during the year, all
KPI's were very strong.”

Tecsys’ share price has leapt ahead in recent weeks, vaulting the stock from its pre-COVID price in the $21-$22 range to now around $29 – $30 per share.

But Ezzat says there’s likely more upside available to TCS.

“In our experience, double digit organic top line growth together with higher visibility revenues are key valuation drivers in the software space. We’ve seen this story before and TECSYS is no exception,” the analyst said.

“We believe the Company’s aggressive SaaS growth, as well as its direct exposure to the favourable trends resulting from COVID-19, warrants a significant multiple rerating. Our ‘pre-COVID’ target of $25.00 per share moves to $35.00 per share on the higher growth profile and lower revenue lumpiness as evidenced by the Company’s latest results,” he wrote.

On the fourth quarter results (revenue of $27.8 million and EBITDA of $2.0 million), Ezzat had been calling for revenue of $26.9 million and EBITDA of $2.6 million, while the consensus estimates were $26.4 million and $2.3 million. Ezzat said the company’s balance sheet is in great shape, having exited the quarter with net cash of $26.7 million.

On the industry environment for TCS’ products, Ezzat said prospects look good.

“The company’s solid bookings during the quarter do not fully reflect a more aggressive adoption and deployment of SCM software in the healthcare space, something we fully expect to unfold over the next few quarters,” Ezzat said.

With the update, Ezzat has maintained his “Buy” rating with the new target of $35.00, which at press time represented a projected 12-month return of 30.2 per cent.