Sylogist is a Buy and coming on strong, says Laurentian

The sales and marketing strategy for enterprise software company Sylogist (Sylogist Stock Quote, Charts, News, Analysts, Financials TSX:SYZ) is starting to bear fruit. That’s the skinny from Laurentian Bank Securities who recently held virtual marketing meetings with management which detailed the company’s steady organic growth improvement and sizeable M&A pipeline. Laurentian analyst Nick Agostino delivered a flash update to clients on Tuesday where he said Sylogist is winning customers from competitors with its fully SaaS-based resource planning solutions.

Agostino said Sylogist has upped its sales and marketing game over the past year and a half, increasing marketing team to now more than five people along with over ten quota-carrying sales members on a salary plus commission structure, whereas before the company had just one person in each category. He said SYZ is now seeing payback on these investments, with its win rate now over 30 per cent and heading for 40 per cent, with an increase in RFP invitations and, most importantly, a steady improvement in its organic growth rate which hit over four per cent excluding foreign exchange as of the second quarter fiscal 2022, which compared to negative 14 per cent two quarters earlier. 

“Over the next one to two years, SYZ does not expect much change in its operating leverage, with EBITDA margins expected in the low 30 per cent range, in-line with our 30-30.5 per cent modelling over the next 18 months,” Agostino wrote. 

“The company suggested the only rationale for EBITDA margins to fall below 30 per cent would be for a positive trade-off in organic growth (say into the high teens or 20 per cent range) as SYZ remains committed to its ‘Rule of 40+’ posturing. The recent U.S. Infrastructure Bill offers a growth catalyst for SYZ for which the increase in investment dollars is expected to flow to the targeted municipal mid-market starting 2H calendar 2022, as municipal budget recalibration commences July 1,” he said.

Agostino noted that despite client stickiness in the industry, Sylogist is winning new large-scale contracts by displacing competitors, where the competition is offering partially cloud-adapted platforms versus SYZ’s 100 per cent SaaS offering (SaaS now represents more than 50 per cent of the Sylogist’s annual recurring revenue).

“Enhanced functionality and services is also driving displacements,” Agostino wrote. “SYZ’s upcoming platform upgrades will incorporate its acquired Payments module … The Payment module could offer material sales growth over time, but EBITDA growth is likely to lag given payments processing is volume-driven. We note, under [President and CEO] Bill Wood’s tenure, SYZ has more than doubled its Net Promoter Score (NPS) to ˃40. According to Retently, an NPS of 40 is considerd average in the B2B Software and SaaS market. SYZ has made ~$1 million/qtr. of incremental R&D spend to improve its product functionality and improve its NPS.”

As for M&A, Agostino estimates Sylogist to have over $40 million in dry powder and a big list of targets, ones that combine IP, talent and customer density. The analyst said that puts the company in good stead to do a deal the size of its Municipal Accounting Systems purchase from March of last year ($37.8 million with $4.3 million in last 12 months EBITDA, equating to an 8.8x multiple). Agostino said a dividend cut to finance M&A is not out of the question but emphasized that such a move is not being considered at this time.

“We estimate current FCF (post dividend and capex) at ~$4 million. Despite the share pullback, no NCIB is planned as SYZ argues its capital allocation is better served to drive organic and M&A growth,” he said.

With the update, Agostino reiterated his “Buy” rating and $12.00 target on SYZ, which is based on a 50/50 blend of 5x 2023 Sales and 16x 2023 EBITDA and at press time represented a projected one-year return of 64.6 per cent.

On comps, Agostino has Sylogist to be currently trading at 3.3x next 12 months EV/Sales and 11.0x next 12 months EV/EBITDA versus its peers excluding outliers at 5.4x and 18.5x, respectively. The analyst noted that these comparisons are the case despite SYZ having a better growth and margin profile.

Last week, Sylogist announced its second quarter fiscal 2022 financials for the period ended March 31, 2022, which featured revenue up 48 per cent to $13.1 million and adjusted EBITDA of $3.9 million compared to $4.4 million a year earlier. Recurring revenues from subscriptions and maintenance hit $8.7 million which was up 24 per cent year-over-year and gross profit was up 35 per cent to $8.4 million.

Wood noted in his quarterly comments that the company has endured a year-plus of COVID-related headwinds before the Omicron surge in Q1 and early Q2 this time around, but he said the company has turned a corner over the back half of the second quarter. 

“Notably, our organic revenue growth rate rose significantly in Q2, reaching neutral after a number of negative quarters, as projects ramped up and nearly $3 million in additional bookings were signed. We maintained strong profitability, with a 30 per cent EBITDA margin in the quarter, all pointing to our results tracking to plan,” Wood wrote in a press release.