Softchoice scores a target lift from Laurentian Bank

Laurentian Bank Securities analyst Nick Agostino has further cemented his belief in Softchoice (Softchoice Stock Quote, Chart, News: TSX:SFTC), giving the company a reiterated “Buy” rating while raising his target price from C$30/share to C$31/share for a projected return of 37.5 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. Agostino’s latest analysis and upgrade comes after Softchoice reported its fourth quarter financial results along with 2021 year-end figures.

“Beyond a strong quarter which included an EBITDA beat, SFTC provided many indications its business outlook remains very attractive, including upped 2022 guidance, an NCIB for which we expect the company to be active given the current share price, and an increased dividend,” Agostino said.

The company’s quarterly results were headlined by net sales of $258.2 million, effectively in line with the $260.9 million consensus estimate and $262.1 million projection from Laurentian Bank Securities. The figure represents 29.7 per cent sequential growth, as well as a year-over-year increase of 11.6 per cent. (All report figures are in US dollars except where noted otherwise.)

The company’s sales verticals balanced each other out, with hardware sales coming in as a miss at $122.3 million (Laurentian estimate of $138.5 million) for a three per cent year-over-year decrease, only for software and cloud sales to eclipse nine figures at $109.1 million, beating Agostino’s projection of $98.1 million while also presenting 49.1 per cent sequential growth and a 31 per cent year-over-year increase.

Softchoice also performed well from the perspective of margins, as the company reported a 33.2 per cent gross margin to provide a beat on the Laurentian estimate of 27.9 per cent while providing a slight increase from the 32.8 per cent margin reported in the previous quarter.

The company’s adjusted EBITDA also provided a beat at a 10.3 per cent margin ($26.5 million) to beat the Laurentian estimate of a 9.4 per cent margin ($24.7 million), as well as providing sequential growth over the 5.7 per cent margin ($11.3 million) reported in the previous quarter, though the margin itself was slightly behind the 11.2 per cent margin reported in the final quarter of 2020.

“Our unique ability to unleash the potential of people and technology drove exceptional results for Softchoice in Fiscal 2021, including 20 per cent growth in our top line gross profit while using our free cash flow to aggressively reduce debt and initiate a quarterly dividend,” said Vince De Palma, President and CEO of Softchoice in the company’s March 4 press release. “We achieved record salesforce productivity during the year through our insight-driven approach with our customers and the investments and initiatives we’ve made to support our strategic focus on delivering advanced software- and cloud-focused IT solutions.”

“Given the visibility in our business model and our continued strong performance, we have increased our growth outlook for 2022,” De Palma added.

Softchoice ended 2021 with $903.1 million in sales, and Agostino expects the company to join the ten-figure club in 2022 with a $1 billion estimate in place (previously $1.04 billion) for a potential year-over-year increase of 10.9 per cent. Looking ahead to 2023, Agostino forecasts a jump to $1.11 billion in net sales, remaining consistent with a potential year-over-year increase of 11 per cent.

From a valuation standpoint, Agostino forecasts the company’s EV/Net Sales to drop from the reported 1.3x in 2021 to a forecasted 1.1x in 2022, then to a projected 1x in 2023.

Agostino forecasts a milestone year for adjusted EBITDA in 2022, projecting a jump into nine figures at $100.3 million (previously $99.5 million) for a projected margin of 10 per cent, with a projected jump to $118.4 million and a 10.7 per cent margin in play for 2023.

In terms of valuation, Agostino projects the company’s EV/EBITDA multiple to drop from the reported 16.6x in 2021 to a projected 11.5x in 2022, then dropping into single digits at a projected 9.7x in 2023. Finally, Agostino has raised his gross margin target from 30.2 per cent to 32.1 per cent in 2022, then sets a projection of 32.4 per cent for 2023.

“Beyond upped guidance, as a further sign of business activity, SFTC announced an NCIB to buy back up to 3.02M shares (~10 per cent of public float) and increased its dividend 29 per cent to C$0.09 per common share, paid quarterly. Theseannouncements highlight a shift in SFTC’s capital allocation focus for2022 from debt reduction to investor returns,” Agostino wrote.

Softchoice’s stock price has scaled up to a 14.5 per cent return for investors over the last 12 months, as well as producing a 5.6 per cent return since the start of 2022. Softchoice’s stock price has sunk since hitting a 52-week high of C$40/share on August 13, dropping to a 52-week low of C$19.56/share on January 10.