Alithya Group is a Buy at these levels, says Laurentian

Laurentian Bank Securities analyst Nick Agostino remains a strong supporter 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 68.9 per cent in an update to clients on Wednesday.

Founded in 1992, Montreal-based Alithya Group provides business strategy solutions, application services and enterprise solutions through Microsoft Solutions and Oracle Cloud Solutions, as well as data and analytics services. Agostino’s analysis comes after Alithya announced that it has entered into a binding agreement to acquire US-based Datum Consulting Group.

“We believe the acquisition of Datum strengthens ALYA’s positioning in the global insurance industry (more than 90 per cent of Datum sales) with proprietary modernization systems (and leverages R3D); 2) offers a recurring revenue profile (40 per cent of Datum’s sales); 3) offers cross-sell potential of ALYA’s services; 4) adds more IP (a differentiation variable in the insurance vertical) to ALYA’s portfolio; and, 5) brings platform expansion including low code platforms such as PEGA and modern cloud platforms (GCP and Azure),” Agostino said.

Coming in at a price tag of $57.5 million with potential earnout considerations of up to $16.4 million, the deal contains a multi-faceted funding structure, including an upfront 3:1 cash to share consideration ratio accounting for $22.4 million, a three-year deferred cash/share consideration of $18.1 million with an identical 3:1 ratio, with the remaining $16.4 million coming in potential earnouts based on gross profit increases over three years, also formulated on a 3:1 ratio between cash and share considerations.

By bringing Datum into the fold, Alithya adds a leader in IP-enabled digital transformation services for data-rich insurers and other regulated entities, with its present clientele including six of the top 10 health insurers in the United States, along with clients in Europe, India, and Australia.

“In Datum, we found a culture and vision in strong alignment with Alithya’s values and corporate objectives along with a global team of experts who service the world’s leading insurance companies,” said Paul Raymond, President and Chief Executive Officer of Alithya in the company’s June 1 press release. “Datum’s highly skilled team as well as its suite of 14 proprietary products and cloud-based software as a service (SaaS) offering will help us add scale in these areas as we continue our growth and transformation initiatives.”

As of December 31, Datum posted $22.7 million in revenue with $7.6 million in adjusted EBITDA for a 33.5 per cent margin. The figures equate to a TTM sales multiple of 1.7x and approximately 5.4x EBITDA, which comes in below Alithya’s 6.5x pre-synergy historical range, making the deal accretive on an EBITDA basis as Alithya trades at 9x NTM EBITDA, according to Agostino.

“Long before the COVID-19 pandemic, insurers were investing in digital transformation spurred by the rise of startups,” said Amar Bukkasagaram, President and Founder of Datum. “Those investments took on new urgency as the pandemic forced businesses to abruptly shift to digital operations. We are well positioned to take advantage of this context for the benefit of our clients as part of the Alithya community.”

Ahead of the company’s next quarterly report on June 17, Agostino maintained his revenue forecast of $432.4 million to wrap up its 2022 fiscal year, good for a potential year-over-year increase of 50.3 per cent. The projection is paired with a gross margin estimate of 27 per cent ($116.7 million) and an EBITDA margin of five per cent ($21.6 million).

The changes to Agostino’s estimates come in 2023 when he expects Datum to be integrated, raising his revenue estimate from $504.3 million to $521.6 million to suggest a year-over-year increase of 20.6 per cent, with none of the other verticals (Systems Integration & Consulting Services, Vitalyst, Payrolling Services and Software Revenue) remaining unchanged.

Meanwhile, Agostino forecasts slightly wider margins for 2023, elevating his gross margin projection from 31 per cent to 31.7 per cent, and also raising his EBITDA margin forecast from 9.4 per cent to 10.1 per cent. 

With an eye toward the company’s 2024 target of $600 million in revenue, Agostino notes that Alithya is happy with its current trajectory, though more mergers and acquisitions could come into play depending on organic growth.

“ALYA is still looking to do acquisitions focused on enhancing its ERP expertise, gaining a presence in SAP ERP expertise, and further penetrating the healthcare, professional and financial services markets,” Agostino said.

Alithya’s stock has produced a 2.8 per cent loss since the start of 2022, working its way back to even after hitting a 2022 low of $2.59/share on May 24, though it is still slightly off from its 2022 high of $3.81/share on February 9.