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OpenText has a 20 per cent upside, says National Bank


After recently posting quarterly results, National Bank Financial analyst Richard Tse is staying bullish on Canadian software company OpenText (OpenText Stock Quote, Chart, News, Analysts, Financials TSX:OTEX), maintaining an “Outperform” rating and target price of $60.00/share for a projected return of 19.7 per cent in an update to clients on Thursday.

Founded in 1991 and headquartered in Waterloo, Ont., OpenText designs, develops, markets and sells information management software and solutions, primarily competing in the Enterprise Information Management (EIM) space. The company’s offerings help facilitate collaboration, sharing, storing and retrieving of information (documents, emails, tasks) for individuals, project teams and organizations.

Tse’s latest analysis comes after OpenText reported first quarter fiscal 2022 numbers, which Tse noted to be in line with expectations.

“OpenText has shifted its focus to organic growth in light of heightened valuations in the sector for M&A,” Tse said in his report, referencing the company’s organic revenue growth. “While that may not appear to represent a material organic growth rate in the context of the IPO names over the past 18 months, it’s considerable for OpenText considering a history that’s lacked organic growth given the company’s scale, maturity and focus on acquisitions. But with acquisitions still being the primary growth driver long term – we see the execution on organic growth converting option value in this name.”


The company’s fiscal Q1 was headlined by $832.2 million in revenue, beating the consensus projection of $824 million and the National Bank projection of $826 million. In particular, Tse noted that the company executed organic revenue growth of 3.5 per cent on a year-over-year basis, with most of it being recurring revenue from Cloud Services and Customer Support. (All figures in US dollars.)

In particular, Cloud Services revenue increased 4.6 per cent year-over-year to $356.6 million in the quarter, while license revenue came in at $73.5 million, well above the National Bank estimate of $65.1 million and representing a 5.8 per cent year-over-year increase.

Meanwhile, the company’s EBITDA came in at $323 million for the quarter for a margin of 38.9 per cent, beating the National Bank projection of $308 million with a 37.3 per cent margin, as well as the consensus projection of a 38.1 per cent margin. That performance translated into CFO of $189.7 million and FCF of $163 million, with Tse noting that the company remains highly disciplined in terms of driving accretive acquisitions without overextending its balance sheet.

“OpenText is leading our customers on their path to digitalization as they shift their work from productivity to creativity. Organizations across the globe trust the OpenText Cloud to deliver greater flexibility, agility and scale to meet the challenges of today’s distributed work environment,”  said Mark J. Barrenechea, OpenText CEO & CTO in the company’s November 4 press release. “The OpenText Cloud uniquely positions us to win customers and take leadership in each of our markets as we empower businesses of all sizes to master modern work, power modern experiences, digitize supply chains, strengthen cyber resilience and build the API economy.”

Tse sees the company’s financial growth maintaining a modest track over the next couple years, forecasting 1.6 per cent growth in 2022 revenue to $3.44 billion, an improvement over the reported $3.39 billion in 2021. From there, Tse forecasts continued improvement in 2023 to a projected $3.55 billion, good for potential year-over-year growth of 3.1 per cent.

Meanwhile, Tse foresees the company’s EBITDA remaining relatively stable in that timeframe, forecasting a minimal dip from the reported $1.32 billion and a 38.8 per cent margin in 2021 to a projected $1.31 billion and 38 per cent margin in 2022, then stepping up to $1.35 billion in 2023, with the margin remaining at 38 per cent.

From a valuation multiple standpoint, Tse’s estimates show modest improvement, with the EV/Sales multiple dropping from the reported 4.7x in 2021 to a projected 4.6x in 2022, then to a projected 4.4x in 2023. Meanwhile, the EV/EBITDA multiple remains level at 12x in 2021 and 2022, then dropping slightly to 11.7x in 2023.

The company’s EPS position also appears to be improving, with a projected jump to $3.54/share in 2022 from $3.39/share in 2021, then moving to a projected $3.56/share in 2023. Consequently, the P/E multiple is projected to drop from the reported 15x in 2021 to a projected 14.4x in 2022, then to a projected 14.3x in 2023.

“OTEX remains one of our favourite ‘legacy’ names,” Tse said. “While the market sentiment has shifted to favour high (organic) growth stories, we continue to see strong relative value with compelling defensive attributes in OTEX.”

Overall, OpenText’s stock price has risen by 13.6 per cent on the NASDAQ in 2021, hitting a high point of $54.98/share on September 1.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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