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Softchoice is still a pass, says Laurentian Bank

Laurentian Bank Securities analyst Nick Agostino’s stance on Softchoice (Softchoice Stock Quote, Chart, News, Analysts, Financials TSX:SFTC) has softened, upgrading from a “Reduce” rating to a “Hold” while maintaining a target price of C$30.00/share for a projected return of 3.8 per cent in an update to clients on Monday.

Founded in 1989 and headquartered in Toronto, Softchoice designs, procures, implements and manages IT environment solutions in the United States and Canada, providing clients with data-driven insights to power digital transformations.

Agostino’s latest analysis and upgrade comes after the company completed a C$150 million (all report figures in US dollars except where noted otherwise) bought deal originally launched September 27, at a value of C$29.50/share. The offering comprised an aggregate of 5.1 million common shares, including a 4.7 million Secondary share offering from shareholders Birch Hill and Keika. The deal also included a 400,000 share Treasury offering for gross proceeds of C$11 million, which was originally included as part of the company’s initial public offering process  to cancel certain vested options through a cash payment for the “in-the-money” amount.

Softchoice is one of many companies impacted by the ongoing global chip shortage, though Agostino noted that the shortage is more pronounced in companies with a higher hardware sales mix, where Softchoice presents a more balanced mix.

“In the case of SFTC, while Hardware was 49 per cent of 1H/21 net sales, the Hardware GP contribution was 29 per cent (and about the same for gross sales excluding the netting effect) vs. 71 per cent for Software/Services,” Agostino said. “The lower Hardware GP contribution helps shield SFTC’s EBITDA/earnings from the ongoing chip shortage.”

Softchoice has been active with its business, announcing a partnership with TakingITGlobal, a Canadian charity supporting social innovation, facilitating connected learning and fostering creativity & digital skills, to provide critical technology support for schools in remote Indigenous communities in Canada’s north as the managed services provider for TakingITGlobal’s Connected North program. 

Most recently, Softchoice announced a multi-year agreement with Amazon Web Services to create solutions for organizations to launch, migrate, modernize, and scale workloads on AWS even faster within the cloud infrastructure.

“Together, Softchoice and AWS are helping our customers fully realize the value of the cloud,” said Andrew Caprara, Chief Operating Officer of Softchoice in the company’s October 12 press release. “With this agreement, we are equipping our customers to successfully modernize their businesses, helping them win with their customers and their people. We are excited for organizations to have the opportunity to benefit from AWS’s robust, customer-centric solutions, Softchoice’s team of AWS experts, and direct access to AWS resources.”

Ahead of third quarter financials due on November 12, Softchoice’s second quarter 2021, delivered in mid-August featured net sales down 2.8 per cent year-over-year to $212.7 million and adjusted EBITDA up 17.2 per cent to $20.9 million.

Softchoice’s revenues are forecasted to continue growing in Agostino’s overall projections, as he forecasts a potential 12.4 per cent year-over-year revenue increase to $940.2 million for 2021, with a forecast to break into ten figures at $1.05 billion in 2022, marking a potential year-over-year increase of 11.6 per cent.

Agostino predicts similar movement from the company’s EBITDA view, forecasting a jump to $70.4 million in EBITDA in 2021 for a potential 7.5 per cent year-over-year increase and 7.5 per cent margin, with a jump into nine figures ($100.1 million) projected for 2022, a potential 42.2 per cent year-over-year increase and an EBITDA margin of 9.5 per cent.

Agostino’s valuation data puts the EV/Sales multiple going from 1.7x in 2020 to 1.5x in 2021 and 1.4x in 2022 and the EV/EBITDA multiple going from the reported 22.2x in 2020 to 20.6x in 2021 before dropping to 14.5x in 2022.

With the company’s next quarterly financial report expected in November, Agostino believes Softchoice remains in a good overall position as it moves forward.

“Despite minimal impact on SFTC’s balance sheet from the recent bought deal, the company remains well funded to manage its operations through our forecast period ending 2022,” Agostino said. “More importantly, while we expect the ongoing global supply chain issues to weigh on near-term results, the company’s lower Hardware weighting/mix, particularly on GP, should help minimize the impact on financial results.”

“The shares currently trade at 14.5x 2022 EV/EBITDA versus comps at 11.7x, excluding outliers. With the shares down 28 per cent since we downgraded following SFTC’s Q2 results in August, given our current RoR projection we upgrade our recommendation to Hold,” Agostino wrote.

Overall, Softchoice’s stock price has spiked in 2021, yielding a return of 44.2 per cent since re-listing on the Toronto Stock Exchange in June, with a high point of C$40.00/share coming on August 13.

Editor’s Note: a correction has been made in this article on Softchoice’s second quarter 2021 financials which were inaccurately stated in an earlier version.

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Geordie Carragher is a staff writer for Cantech Letter
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