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Take a pass on Enghouse Systems, this investor says

Canadian software name Enghouse Systems (Enghouse Systems Stock Quote, Charts, News, Analysts, Financials TSX:ENGH) may be down on its luck this year but that’s not necessarily a good reason to pick it up, according to Jordan Zinberg of Bedford Park Capital. Zinberg thinks there are better options out there in the Canadian tech space.

Markham, Ontario-based Enghouse is a growth-by-acquisition story in the enterprise software field, with the company’s focus being on remote work, visual computing and next-generation network communications. But while the stock had an up and down 2020, ultimately delivering in the end a positive return of 27 per cent, 2021 has so far not been so good, with ENGH currently down about seven per cent.

Zinberg says Enghouse’s returns on investment have recently had a negative impact on the share price.

“This company has been around for a while,” said Zinberg, President and CEO at Bedford, who spoke on BNN Bloomberg on Monday. “I would say in contrast to Constellation Software, Enghouse tends to buy more medium quality assets that they can buy very cheaply as opposed to trying to buy high quality assets that they might have to pay up a bit.”

“What they’re very good at is buying those types of assets and then repositioning them, and management is very well known in Canadian tech circles,” he said. “The stock has come off a bit, and I think the reason is we’ve seen some  deterioration in their return on invested capital. I believe the multiples are somewhere around 17-18x earnings right now, which is approximately equal to their growth rate.”

“So, I would say if you own some, you can hold it — you’re definitely not going to get hurt with it. [But] it wouldn’t be my top pick in the Canadian tech space,” he said. 

Enghouse released its fiscal second quarter 2021 financials in June for the period ended April 30, which showed revenue down year-over-year due to the peaking of its video software solutions business Vidyo, bought in 2019 for $60 million. Over COVID-19, Vidyo’s products were in higher demand. 

“Although revenue achieved for the quarter was $117.3 million compared to record revenue of $140.9 million in the same period in the prior year, Enghouse continues to generate positive cash flows, operating income and profitability,” said Enghouse in a June 10 press release.

“The decline in revenue was driven primarily by the previous year’s significant increase in our Vidyo business that has now returned to levels that are more consistent with pre-COVID volumes. Enghouse continues to expand its cloud offerings and has implemented new initiatives aimed at increasing sales of cloud-based products while offering choice to its customers by providing multi-tenant cloud, private cloud and on-premise solutions to the market,” the company said.

Last month, Enghouse expanded its suite of Vidyo products by acquiring SaaS enterprise video software company Momindum, whose platform manages virtual live events and on-demand videos. Enghouse said the acquisition will broaden the company’s video collaboration solutions through Momindum’s next-gen platform.

Adjusted EBITDA for the fiscal Q2 was $40.2 million compared to $49.3 million a year earlier while cash flow from operations was $49.3 million compared to $50.0 million a year ago. Enghouse finished the quarter with $169.6 million in cash and equivalents and no debt, paying out $90.5 million in dividends for the quarter.

“As always, Enghouse prioritizes its long-term growth strategy over quarter-to-quarter results, investing in products while ensuring continued profitability and maximizing operating cashflows. As a result, Enghouse has replenished its acquisition capital, while returning $83.2 million in special dividends to shareholders,” the company said.

Zinberg says Enghouse is a high quality business with good fundamentals and a solid management team but that the stock is most likely “a decent Hold” at current levels.

“There are so many phenomenal technology companies right now in the Canadian equity markets. What we’re typically looking for is companies that are giving us a growth rate that’s going to be higher than their valuation,” Zinberg said. 

“So in this case, I believe the growth rate is around 17 or 18 per cent and the P/E is around 17 or 18x, so to me that stock is fairly valued. It’s not a situation where we have extreme overvaluation and I would call it a Sell, but at the same time we’re not getting that trade-off that we’re looking for in terms of growth and valuation that we are able to get on some other stocks,” he said.

“When you look at the Canadian market there tends to be a very small number of companies that I think I want to be long on and there may be a small number of companies that I want to be short on. And then there’s a number of companies that sort of sit in the middle that that I would be more neutral on, and this would fall into that category,” Zinberg said.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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One thought on “Take a pass on Enghouse Systems, this investor says

  1. couldn’t agree more. some of the recent acquisitions have not yielded the big upside revenues that had been promised! Seems like they have to spend more than expected in product updates to be competitive in the market!

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