Good upside potential from Alithya Group, says Echelon

Shares of Alithya Group (Alithya Group Stock Quote, Chart, News, Analysts, Financials TSX:ALYA) have held up pretty well over the past year and analyst Amr Ezzat of Echelon Capital Markets is staying bullish on the stock, maintaining a “Buy” rating but reducing his target price from $5.50 to $4.75 for a projected total return of 47.5 per cent in an update to clients on Friday.

According to Ezzat, the reduction in target price for the Montreal-based digital strategy and technologies company, which includes strategic consulting, digital transformation, organizational performance, and enterprise architecture services, comes amid revisions to account for the current inflationary environment as well as a shift in overall valuation parameters.

Ezzat’s updated analysis comes after the company released fourth quarter financial results for its 2022 fiscal year, with Ezzat noting the results showcased strong momentum for Alithya.

“We are encouraged by the sales trajectory as well as the Company’s recently announced Vitalyst and Datum acquisitions,” Ezzat said.

Alithya advanced itself from a financial perspective in the quarter, as its $120 million revenue report represented a 53.9 per cent year-over-year increase (54.3 per cent increase on a constant exchange basis) while also beating the Echelon forecast of $105 million and the Street projection of $112.7 million.

Geographically, Alithya’s Canadian revenue was still the biggest growth driver at $74.2 million, good for a 63.3 per cent year-over-year increase, with Ezzat attributing the uptick to organic growth in all areas of the business, along with revenues from its recent acquisition of R3D and growth from two long-term contracts signed as part of the same acquisition.

South of the border, Alithya’s revenue from the United States jumped to $41.3 million for a 39.4 per cent year-over-year increase, while international revenue jumped 54.8 per cent to $4.5 million, adjusted to $4.8 million and a 66.2 per cent year-over-year increase based on constant currency.

Ezzat also noted that the company got a $5 million revenue contribution from its recent acquisition of Vitalyst, while its acquisition of Datum Consulting Group, which was announced on June 1, is expected to close on June 1, bringing LTM revenue of $22.7 million into the fold.

“Our healthy pipeline of signed contracts reflects the level of trust that our customers continue to place in us in carrying out their critical, digital transformation projects,” said Paul Raymond, President and Chief Executive Officer of Alithya in the company’s June 17 press release. “It also validates the strategic merits of our recent acquisitions, with customers now demanding additional services derived from those transactions, including new solutions and bolstered expertise.”

On the margins, Alithya reported adjusted EBITDA of $6 million to match the Street projection and beat the Echelon estimate of $5.6 million, with the contribution from the Vitalyst acquisition and increased margins  being partially offset by higher SG&A expenses. The company’s EBITDA could also get a boost from the Datum acquisition, as the company produced $7.6 million in EBITDA for a 32 per cent margin, a significant jump in relation to the five per cent EBITDA margin Alithya reported in the quarter.

“The acquisition thereby equips Alithya with a leading proprietary platform, which supports insurers and other regulated industries in their digital transformation efforts, providing the Company with deepening exposure to the fast-growing InsurTech market,” Ezzat said of the Datum acquisition.

Meanwhile, the company’s gross margin came in at 25.9 per cent, down from 30.1 per cent. According to Ezzat, Alithya’s aim is to gradually transform R3D’s revenue mix by increasing revenues from permanent employees relative to subcontractor revenues, which would result in higher gross margins.

With the fourth quarter results now public, Alithya wrapped up its 2022 fiscal year with $437.9 million in revenue for a landmark 52.2 per cent year-over-year increase. The report also prompted Ezzat to revise his 2023 estimate, raising his target from $476.9 million to $506.8 million for a potential year-over-year increase of 15.8 per cent.

From a valuation perspective, Ezzat forecasts the company’s EV/Revenue to dip from the 0.9x from 2022 to 0.8x in 2023, presenting a small premium to the Street projection of 0.8x and a discount to the global peer group average of 1.4x, along with the North American peer group average of 1.5x.

On the margins, Alithya reported $22.6 million in adjusted EBITDA for 2022 to produce a 5.2 per cent margin, which Ezzat forecasts to expand to 7.8 per cent ($39.3 million) in 2023.

In terms of valuation, Ezzat puts the company’s EV/EBITDA multiple at 9.8x in 2023, a premium to the Street projection of 7.5x and the global peer group average of 8.2x, though it presents a discount compared to the North American peer group average of 11.2x.

Alithya’s stock price has been somewhat ambivalent in 2022 at a 0.3 per cent loss, rebounding from its May 24 low of $2.59/share to post about a 25 per cent return since then, though it reached a 2022 peak of $3.81/share on February 9.