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Calian Group has a 49 per cent upside, says Laurentian Bank

In an equity research note to clients on Thursday, Laurentian Bank Securities analyst Nick Agostino counted down the reasons why he likes the latest acquisition by Calian Group (Calian Group Stock Quote, Chart, News, Analysts, Financials TSX:CGY), one which marks its first big move into the United States. With the update, Agostino maintained a “Buy” rating on CGY while raising his target price from $74.25/share to $80/share for a projected return of 49 per cent.

Founded in 1982 and headquartered in Ottawa, Calian Group provides products, business services and solutions to a range of government, defense and commercial customers, with its business segmented into Advanced Technologies, Health, Learning and IT operating units. Calian has a number of partners, including Cisco, Dell, HPE, Microsoft, Oracle, Nutanix, Dave & Busters, Plains All American and Midland Health Systems.

Agostino’s updated analysis comes after Calian announced a definitive agreement to acquire the assets of Houston-based IT and cyber solutions provider Computex Technology Solutions from American Virtual Cloud Technologies.

“The acquisition of Computex will bolster CGY’s end-to-end model in the IT and Cyber Solutions division, and represents the first major strategic entry for the company into the U.S. market,” Agostino said.

Agostino said the acquisition has been in the works since American Virtual Cloud Technologies approached Calian in November, as it was looking to divest the asset to fully focus on its cloud communications and collaboration offerings, raise equity to pay off its existing debt and sought out a buyer who would be ready to move quickly.

With a cash balance of $78.6 million at the end of its most recent quarter, Calian paid the $38 million transaction fee entirely in cash, with the deal expected to officially close in the second quarter of 2022.

All told, Agostino projects the acquisition will increase the company’s IT revenue from $108.8 million to $145.4 million, accounting for 23.9 per cent of the company’s revenue mix.

The deal represents a 0.5x Revenue / 1.3x Recurring Revenue multiple and a 5.1x EBITDA multiple, comparing favourably against the 1.9x sales multiple paid for Dapasoft / iSecurity in February 2021, and historically in-line with the 5x EBITDA multiple Calian has paid for its previous IT-related acquisitions.

“Calian is moving towards a full-service model that will provide end-to-end IT and cyber solutions for our customers,” says Sacha Gera, Calian Group’s President of IT and Cyber Solutions in the company’s January 26 press release. “We’re excited about joining forces with Computex to provide an even stronger offering to our combined customer base and the market through an expanded sales distribution network.”

Computex Technology Solutions primarily serves the U.S. midwest, with a notable footprint in Texas, Minnesota and Florida. The company’s solutions cover data centers, enterprise networking, cloud services, managed IT services, cybersecurity and integration services offered to clients within multiple industries including healthcare, learning, oil and gas, and manufacturing.

The deal is also expected to bring approximately 1,100 Computex employees into the Calian family, while also helping to expand Calian’s sales distribution network and producing cross-sell opportunities amongst Computex’s clients particularly within the healthcare and learning industries.

With the acquisition in place, Agostino has revised some of his financial projections for 2022, raising his revenue estimate from $570.9 million to $607.5 million for an implied year-over-year increase of 17.2 per cent in relation to the 2021 report of $518.4 million. Looking ahead to 2023, Agostino forecasts an increase to $682.6 million for an implied year-over-year increase of 12.4 per cent.

Agostino’s adjusted EBITDA projection also gets a revision, raising the 2022 estimate from $59.1 million to $62.9 million for a 21.2 per cent year-over-year change, with the previous 10.4 per cent margin remaining in place. For 2023, Agostino projects adjusted EBITDA of $68.4 million for a 10 per cent margin and a year-over-year change of 8.7 per cent.

Calian’s valuation numbers also look good from Agostino’s perspective, as he projects the company’s EV/EBITDA multiple to drop from the reported 11.1x in 2021 to a projected 9.2x in 2022, then to a projected 8.4x in 2023.

Meanwhile, Agostino projects a similar trajectory for the company’s P/E multiple, forecasting a drop from the reported 15.6x in 2021 with EPS of $3.50/share (all EPS figures in US dollars) to a projected 13.7x in 2022 with EPS of $3.99/share (previously $3.70/share), with another projected change to 12.5x in 2023, paired with an EPS of $4.37/share.

Overall, Agostino is confident in the company’s direction as it continues to progress through 2022.

“We believe there is pent-up demand for CGY’s products as we exit the pandemic, particularly in the Advanced Technologies, Learning, IT and CyberSecurity verticals,” Agostino said.

Calian Group’s stock price has dropped by 8.2 per cent over the last 12 months, and 8.1 per cent in January alone. The company’s 52-week high came on March 2 when it closed at $66.90/share, with the 52-week low being $53.42/share on Monday, though it has rebounded by 5.2 per cent since then.

About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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