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Computer Modelling Group is trading at a discount, says iA Capital

CMG stock

Elias Foscolos of iA Capital Markets likes the look of Computer Modelling Group (Computer Modelling Group Stock Quote, Chart, News TSX:CMG), reiterating his “Speculative Buy” rating and target price of $6.00/share in an update to clients on September 16.

Headquartered in Calgary, Computer Modelling Group produces reservoir simulation software for the oil and gas industry, with offices throughout the world, including Houston, Dubai, Rio de Janeiro, Bogota, London and Kuala Lumpur.

Foscolos’s latest analysis comes after iA Capital Markets hosted investor meetings with CMG management, where the takeaways reinforced iA’s investment thesis on the company.

“CMG has developed its suite of software through a long history of R&D and real-world problem solving with customers, and as a result has established itself as one of the dominant players in oil reservoir simulation worldwide, specializing in modelling for complex assets that use advanced recovery techniques,” Foscolos said.


The company reported its financial results for the first quarter of its 2022 fiscal year in August, headlined by revenue of $14.4 million in the quarter, a 14 per cent year-over-year decrease the company attributed to decreases in both software revenue (86 per cent of the company’s revenue) and professional services revenue (14 per cent), while the company’s annuity/maintenance license revenue also dropped by 15 per cent.

Though the company’s sales remain below pre-pandemic levels, Foscolos believes the company is in position to improve thanks to late-cycle events and its resilience in relation to its industry peers.

“While customers have remained cautious as demand for oil has improved, industry activity has been trending positively and we would expect revenue recovery in F2023 and beyond as the majority of E&P capital budgets are finalized in December/January,” Foscolos said.

However, there were positives for the company over the fiscal first, as total operating expenses decreased by 19 per cent on account of compensation reductions, receipt of the CEWS and CERS benefits and lower stock-based compensation expense, while the company’s operating margin increased to 39 per cent from 34 per cent in the comparative quarter, reduced to 36 per cent when CEWS and CERS benefits are removed from the equation.

The company has kept moving forward throughout the year since appointing John Billowits, who previously was the CEO of Vela Software, Chief Financial Officer of Constellation and President of the Jonas Operating Group, to its Board of Directors in January.

“John is an accomplished software executive whose leadership has helped a number of software companies improve market and product success,” said CMG Board Chair John Zaozirny in the company’s January 20 press release. “John’s skills and experience are a welcome complement to CMG’s Board and we look forward to his contributions.”

Though company management acknowledges that it may not meet its growth projections for 2023, Foscolos believes the company has multiple growth pillars it can build upon to attain low double-digit revenue growth, which includes putting a focus on building its market share in the Eastern Hemisphere, increasing sales of its higher-value CoFlow multi-disciplinary collaborative modelling environment, serving energy transition, expanding its unconventional simulation offerings, and increasing the price of its software.

From a capex perspective, Foscolos believes the company’s preference would be for smaller, bolt-on parallel product acquisitions while maintaining the current dividend and adequate cash reserves.

Foscolos projects CMG to reach $63 million in revenue for its fiscal 2022, a small step down from the $67 million reported in its 2021 fiscal year, though he also projects a rebound to $68 million in his newly-released fiscal 2023 forecast.

The adjusted EBITDA projections follow a same pattern, falling from the reported $37 million in 2021 to a projected $31 million in 2022 for a margin of 49.2 per cent, then rising again to a projected $34 million in 2023 for an even 50 per cent margin.

Foscolos’s key trading multiples show the company in a healthy position, with the EV/EBITDA multiple forecast to drop slightly to 11.8x in 2022 from 12.1x in 2021, then falling again to a projected 10.6x in 2023. Meanwhile, after a spike to 22.9x in 2021, Foscolos projects the price-earnings multiple to come down to 20x in 2022, then to a projected 17.4x in 2023.

Overall, Foscolos is a believer in Computer Modelling Group’s direction moving forward.

“We forecast that CMG will post improved financials commencing in F2023, with the potential to eventually deliver low double-digit revenue growth through multiple levers,” Foscolos said. “Given the pressure on the stock YTD, we believe that CMG’s leading, defensible competitive position, global diversification, and strong earnings and cash flow profile are being offered at a discounted price.”

Computer Modelling Group’s stock price is down four per cent for the year to date, reaching a high point of $6.65/share on February 9. At the time of publication, Foscolos’ $6.00 target price represnted a projected one-year return of 35 per cent.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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