Take a pass on Alithya Group, says Echelon Capital

Just-released quarterly results from Alithya Group (Alithya Group Stock Quote, Chart, News, Analysts, Financials TSX:ALYA) were lower than expected but sales look to be picking up, says Echelon Capital Markets analyst Amr Ezzat. In an update to clients on Thursday, Ezzat reiterated his “Hold” rating while raising his target price from $3.25 to $3.50.

Founded in 1992, Montreal-headquartered Alithya is a strategy and digital technology consulting firm with four areas of focus: strategy services, application services, enterprise solutions and data and analytics. The company delivered its third quarter fiscal 2021 results on Thursday for the period ended December 31, 2020, featuring revenue up 6.6 per cent year-over-year to $70.6 million and adjusted EBITDA of $2.3 million, down from $3.5 million a year earlier. Net loss for the quarter was $4.8 million or $0.08 per share compared to a loss of $1.8 million or $0.03 per share a year earlier.

Alithya added seven new clients over the fiscal Q3 and saw bookings reach $126.1 million for a book-to-bill ratio of 1.86 for the quarter and 1.33 year-to-date. Gross margins went from 30.4 per cent a year ago to 28.9 per cent, with the company saying the drop came primarily from its business in Canada and was due to COVID-19’s impact on market conditions. Alithya ended the quarter with $45.3 million in net debt compared to $44.2 million at the close of the previous quarter.

Alithya president and CEO Paul Raymond commented in the company’s quarterly press release that demand for their digital transformation expertise has been strong, with tje company implementing 22 Microsoft and Oracle enterprise resource planning and customer relationship management solutions over the quarter along with 22 enterprise performance management go-lives for its North American customers.

“Despite the global pandemic and working remotely, we have continued to build our trusted partner reputation, as demonstrated by record bookings. In the current environment, our revenues increased compared to the same period last year, driven by both our Canadian and US operations,” Raymond wrote. “I am pleased to report that Alithya’s larger historical Canadian clients’ momentum is improving and showing, in aggregate, resumed growth, both on a year-over-year and sequential basis.”

In his update, Ezzat noted that the fiscal Q3 numbers were lower than he’d expected, with the $70.6-million in revenue coming in under his $73.2-million estimate and the consensus $71.8-million, while the adjusted EBITDA of $2.3 million was under his $2.8 million and the Street’s $2.4 million.

Ezzat said he’s rejigging his EBITDA estimates for the upcoming fiscal 2022 to take account of the lower gross margin profile. Altogether, he’s expecting fiscal 2021 revenue and adjusted EBITDA of $282.9 million (representing 14-per-cent year-over-year growth) and $10.0 million (representing 10.0-per-cent growth). For 2022 he is calling for $299.8 million in revenue and $15.3 million in adjusted EBITDA.

“Alithya Group reported FQ321 results, that showed sequential sales growth despite a usually seasonally weak December quarter,” Ezzat wrote. “While margins improved sequentially, EBITDA came in below, reflecting continued lower utilization year-over-year and higher SG&A than our forecast.”

“The Company reported a healthy book-to-bill of 1.86x for the quarter on recent contract wins. On a year-to-date basis, book-to-bill stands at 1.33x. We are encouraged by the sales trajectory and await confirmation of the trend over the next couple of quarters before meaningfully adjusting our estimates,” Ezzat wrote.

“We are re-iterating our Hold rating and adjusting our target to $3.50/shr from $3.25/shr on the sales stabilization. We expect solid execution to help resurface value,” he said.

At the time of publication, Ezzat’s $3.50 target represented a projected one-year return of 6.7 per cent.

Ezzat said Alithya’s recent acquisitions have been a bright spot, pointing first to Internet of Things and AI specialist Matricis, bought in October 2019 for $7.2 million in cash and stock, with the analyst saying Matricis is generating an impressive plus-$1 million in EBITDA on a roughly $6-million topline.

Alithya acquired Oracle cloud specialist Travercent in December 2019 for $23.7 million in December 2019, on which Ezzat said, “Given its exclusive cloud focus and its IP-differentiated offering, we estimate the target is generating a healthy 20-25 per cent, implying an EBITDA range of US$2.5-3.0 million (based on historical multiples ALYA pays for acquisitions) and a topline of ~US$12.0 million.”

Finally, Ezzat mentioned QA software specialist Askida which Alithya acquired in February 2020 for $16.0 million. The analyst estimated that deal at 7.0x EBITDA and implying EBITDA of about $2.3 million and a 17.5-per-cent margin.

Alithya’s share price has been overall drifting downwards since the company went public through a reverse takeover in late 2018. For 2020, the stock finished down 25 per cent, while so far in 2021 ALYA is up 24 per cent.