Laurentian Bank Securities analyst Nick Agostino is affirmative in his view of Alithya Group (Alithya Group Stock Quote, Chart, News, Analysts, Financials TSX:ALYA), maintaining a “Buy” rating and $5/share target price for a projected one-year return of 35.9 per cent in an update to clients on Thursday.
Founded in 1992, Montreal-based Alithya Group provides business strategy solutions, application services, enterprise solutions through Microsoft Solutions and Oracle Cloud Solutions as well as data and analytics services.
Agostino’s analysis comes after Alithya reported results for the third quarter of its 2022 fiscal year, headlined by a revenue beat of $109.7 million to come out ahead of the Laurentian Bank projection of $104.5 million and produce a 55.4 per cent year-over-year increase, including 33.5 per cent organic growth.
From a geographical perspective, business in Canada accounted for 65.7 per cent of the company’s revenue in the quarter at $72.1 million, an 80.2 per cent year-over-year increase.
Meanwhile, the United States market also reported growth, up 22.7 per cent year-over-year to reach $33.7 million in the quarter, providing an additional 30.7 per cent.
“I am very proud to report that Q3 saw another record quarter achievement in terms of revenues,” said Paul Raymond, President and CEO of Alithya Group in the company’s February 11 press release. “It was also a quarter where we experienced a continuation of our industry leading organic growth, across all geographies. Despite impacts from employee downtime due to COVID, and well-deserved vacations for many of our people in December, we posted a record quarter for billable hours and enterprise cloud go-lives.”
However, for the revenue-driven positives, the margins provided a counterbalance, as the company missed on its EBITDA target, (4.1 per cent margin and $4.5 million versus 4.8 per cent estimate and $5 million in EBITDA), with Agostino pointing to the lower-than-anticipated gross margin of 25.8 per cent on a higher number of subcontractor utilization to fulfill demand on account of COVID-19 and holiday breaks along with lower than anticipated software revenue.
According to Agostino, Alithya currently has a book-to-bill ratio of 1.14x, suggesting high demand for its products, including its Higher Education practice and its solutions through Microsoft and Oracle Cloud. Agostino also noted the Quebec government’s stated goal of transitioning primarily to cloud-based operation within the next three years as a tailwind going forward.
Since the close of the previous quarter, Alithya also boosted its fortunes through the acquisition of Vitalyst, a Microsoft Gold Partner supporting over 350 business applications for over 400 clients in over 20 countries, for $64.1 million on February 1.
As of December 31, Vitalyst posted TTM revenue of $33.7 million, paired with adjusted EBITDA of $12.9 million.
The positive quarterly results have prompted Agostino to modify some of his future financial projections, as he now forecasts the company to bring in $114.5 million in revenue for its final quarter of 2022 (previously $111 million) and projects a year-end total of $432.4 million (previously $423.7 million), with the new number implying a year-over-year increase of 50.3 per cent.
Agostino has also bumped up his 2023 projection to $504.3 million (previously $495 million) for a potential year-over-year increase of 16.6 per cent, with Vitalyst forecasted to account for seven per cent of the company’s revenue mix compared to the 1.3 per cent forecasted in 2022 post-integration.
Agostino is also in line to lower his EV/Sales valuation multiple projection from 1.5x in 2021 to 1x in 2022, then dipping further to a projected 0.9x in 2023.
On the flipside, Agostino has reduced his margin projections in the short term, forecasting a 4.4 per cent EBITDA margin at $5.1 million for the final quarter of 2022 (previously a 5.6 per cent margin at $6.2 million), yielding a reduced year-end projection of a five per cent margin at $21.6 million, compared to the previous estimate of a 5.5 per cent margin at $23.3 million in EBITDA.
Looking ahead to 2023, Agostino lowered his projection from a 10.2 per cent margin at $50.5 million in EBITDA to a 9.4 per cent margin with $47.2 million in EBITDA.
Agostino’s EV/EBITDA multiple forecasts show continuous improvement, as he projects a drop from 44.9x in 2021 to 20x in 2022, then to a forecasted 9.2x in 2023. However, as of the 2022 forecasts, Alithya is still a step behind the overall average of the peer groups in system integrator and VAR/ITSP sectors.
“While ALYA continues to outperform on revenues, bookings and backlog growth, the slower shift to a higher FTE base will impact EBITDA / margins in the near-term,” Agostino said. “While some short-term profitability squeeze is expected, the operating leverage inherent in the business model gives us comfort in our long-term forecast.”
Alithya Group’s stock price has elevated by about 11 per cent over the last 12 months, with about a 15 per cent return since the start of 2022. Alithya’s climb began after hitting a 52-week low of $2.54/share on May 28, eventually reaching a 52-week high of $4.05/share on July 27.