Sangoma still trading at a big discount to its peers, Beacon says

Beacon Securities analyst Gabriel Leung is standing firm on Sangoma Technologies (Sangoma Technologies Stock Quote, Chart, News, Analysts, Financials TSXV:STC), reiterating his “Buy” rating and $6.50/share target price in his latest company analysis on Friday.

Headquartered in Markham, Ontario, Sangoma provides a comprehensive Unified Communications (“UC”) solutions to service providers, carriers, enterprises, small-to-medium sized businesses and original equipment manufacturers.

Sangoma gave a business update on Thursday including preliminary 2021 fiscal year-end guidance, which called for revenue of $167 million and EBITDA greater than $30 million, ahead of their full release in September. That quarter will be the first set of results to feature numbers from Florida-based Star2Star Communications since Sangoma’s acquisition was made official on March 30.

Sangoma President and CEO Bill Wignall called the company’s fiscal 2021 (year-end June 30) another very strong year.

“It is reassuring to see continued momentum in the business during these difficult times, and I’m especially gratified to finish the year with Sangoma expected to exceed our previously announced guidance,” said Wignall in a press release.

Leung is taking the updated guidance as a positive, saying in his report, “It suggests that the integration of Star2Star, at least from a financial perspective, is progressing well with no negative surprises. We will wait for the full FY21 results in late September to see if the company offers any additional insights on further top and bottom line synergy opportunities.”

“The company’s results are equally impressive given the strong headwinds from forex,” Leung wrote. “Recall that although the company reports in Canadian dollars, the majority of its bookings are in US dollars. Furthermore, the US dollar was down about 11.4 per cent year-over-year based on average rates in fiscal Q4.”

Beacon Securities projections have Sangoma continuing its upward trajectory over the next year or two, with the previously-mentioned $167 million in forecasted 2021 revenues (year end June 30), representing a 27.1 per cent increase over 2020’s $131.4 million in revenue. 2022 projects to be even more fruitful for Sangoma, according to Leung, as the forecasted $252 million in revenue would represent a 50.8 per cent year-over-year increase.

Sangoma’s EBITDA appears to be on a similar growth pattern, with Leung forecasting $30 million in EBITDA for 2021 and $44.6 million for 2022.

The company’s valuation ratios are forecast to drop in the same period, with a forecasted change in the EV/Sales multiple from 2020’s 5.7x to a forecasted 4.5x in 2021, then falling again to 3.0x in 2022. Sangoma’s EV/EBITDA multiple looks to fall on a similar path, moving from 34.5x in 2020 to a projected 24.8x in 2021, then dropping again to 16.7x in 2022.

Sangoma recently highlighted successes of its systems with a number of clients, including transportation companies Coach USA and Coleman Allied, a number of mobile dentists through ReachOut Healthcare America and the Millcreek Township School District in Pennsylvania.

“Customers are definitely seeing the value in our industry-leading suite of cloud communications services, which is further enhanced by our rapid integration with Star2Star,” said Bill Wignall, President, and CEO of Sangoma in the company’s July 23 press release.

“We offer the broadest product portfolio in the industry with the most complete set of cloud communications services, flexible deployment options including cloud/premise/hybrid, and exceptional customer service, a combination that resonates with customers,” Wignall wrote. “This is driving our growth in both new and existing client relationships, across our key target segments, each of which is illustrated in the four examples below: expansion, new contract wins, migration from our on-premise base, and replacement of competitive on-prem systems.”

Sangoma has earned its fair share of the limelight over the last few months, with its cloud-native platform earning TMC’s Customer Product of the Year, the Internet Telephony SD-WAN Product of the Year Award, and a Unified Communications Product of the Year awards for 2021 from TMC, as well as being recognized as a top-5 Communications-as-a-Service (CaaS) provider by Omdia, a global technology research consulting firm. 

“It’s a high honour to be recognized amongst the top five providers in North America,” Wignall said in the company’s June 2 press release regarding the Omdia recognition. “We are immensely proud of our team’s hard work over this past year to keep us moving forward, and for coming together to create one of the leading UCaaS providers worldwide. We look forward to continuing to offer our Partners and Customers more innovative and high-value UCaaS solutions to help them reach their mission-critical goals!”

Leung believes the company continues to warrant favourable attention from potential investors.

“From a valuation standpoint, given the company’s strong financial performance, along with potential upside as the integration of Star2Star plays out, we believe Sangoma continues to trade at a significant discount to the group at 3x EV/Sales and 16.7x EV/EBITDA versus comparables at 8.1x and 42.6x respectively,” Leung said.

Sangoma Technologies ended the week trading at $3.05/share, 23 cents up on its Thursday closing of $2.82/share, though still down 30 cents for the year to date. At press time, Leung’s $6.50 target represented a projected one-year return of 114 per cent.