Is Sylogist stock a buy?

Investors searching for under-loved tech stocks may want to take a look at Canadian software provider Sylogist (Sylogist Stock Quote, Chart, News, Analysts, Financials TSXV:SYZ). The CRM and enterprise resource planning company is about to graduate from the Venture to the TSX main board and it just pulled off a major acquisition that has the stock jumping. Even more appealing, Sylogist is trading at a cheap multiple compared to its peers, according to portfolio manager Colin Stewart who recently named it as one of his Top Picks for the next 12 months.

“Sylogist is not that well known of a software company, but it’s a smaller Canadian software company that provides enterprise resource planning software, primarily to governments and not-for-profit organizations,” says Stewart, CEO at JC Clark Limited, who spoke on BNN Bloomberg on Wednesday.

“They recently hired a new CEO whose mandate is to focus on accelerating growth, and we think he’s committed to doing that,” he said. “It has a very high-margin structure that generates a lot of free cash flow and relative to other software companies it trades it only 12x EBITDA. So it’s almost what we would think of as like a value technology play.”

“As the company grows and makes more acquisitions and becomes better known, we think it could be revalued to trade more in line with its peers at a higher multiple,” Stewart said.

Calgary-based Sylogist announced on Thursday the acquisition of Oklahoma-based Municipal Accounting Systems (MAS) in an all-cash deal worth $37.8 million. MAS, which provides student information management and accounting solutions for K-12 public schools, serves about 500 school districts or almost 85 per cent of Oklahoma’s public school education market with its SaaS-based platform. Sylogist said MAS generated about $7.4 million in revenues last year with adjusted EBITDA coming in at about $4.3 million.

Sylogist said it will pay for the purchase half with cash on hand and half through a credit facility that has recently been extended from $40 million to $75 million. Sylogist president and CEO Bill Wood said acquiring MAS shows his company’s ability to execute on its accelerated growth strategy.

“MAS is highly complementary to our existing SaaS K-12 solution and we have identified value-add capabilities within each platform that can integrate with the other,” said Wood in a press release. “We are excited to offer a more feature-rich, scalable and flexible solution to customers and new school districts throughout North America. Further investments in our go-to-market strategy will greatly benefit from the leverage this larger scale and breadth of offering provides.”

Sylogist’s share price has been popping over the past couple of days after being flat for much of the past few months. The stock has had its ups and downs over the past five-plus years but put it together last year for a return of 20 per cent. That’s on top of a very healthy dividend for a small-cap tech stock, currently sporting a yield of 3.6 per cent.

Stewart says the combination of high margins and strong outlook make Sylogist a great pick in Canadian tech.

“This company has margins north of 50 per cent and that’s a very attractive profile because on their recurring revenue stream, once the software is developed it’s all about sales and gathering new customers and upgrading it from time to time, but it really is a great high-margin, recurring revenue business and that’s one of the reasons we like Sylogist,” Stewart said.

Sylogist last reported its financials in early February where its first quarter fiscal 2021 for the period ended December 31, 2020, featured revenue up seven per cent year-over-year to $9.5 million and adjusted EBITDA down to $4.9 million from $5.2 million a year earlier.

The company said the drop in earnings was due to among other things a depreciating US dollar and new lower-margin professional services from its InfoStrat division. Market headwinds in 2020 due to the pandemic were also a challenge for Sylogist but management pointed in their report to the company’s continuing strong recurring revenue base and a bump in professional services revenue as helpers to the Q1 revenue to a seven-per-cent increase. Even with the pandemic-related challenges, the company nonetheless managed to complete a share repurchase of 68,400 shares over the quarter at an average price of $10.56 per share.

Wood, who came on as CEO this past November said in the press release, “Over the past several weeks, I have been leading Sylogist through a strategic planning process, with a focus on accelerating both organic and inorganic growth. Having now been at the helm for 90-plus days, I’m increasingly excited about the opportunities for the company and look forward to sharing more about our plans and the path forward in the near future.”