Calian Group is a Top Pick, says Echelon

Now’s the time for investors to take advantage of a stock that’s been unfairly punished over the past couple of months. Echelon Capital Markets analyst Amr Ezzat reported on Canadian tech name Calian Group (Calian Group Stock Quote, Charts, News, Analysts, Financials TSX:CGY) in a Tuesday update to clients, saying the stock pulled back on lowered guidance this summer from management but that the company’s short and long-term prospects are still excellent.

Ottawa-headquartered Calian Group, which has business and technology solutions and services for companies in the health, IT, learning and advanced technologies areas, reported on August 10 its third quarter financials for the fiscal 2022 year, featuring revenue up ten per cent year-over-year to $150 million and adjusted EBITDA up eight per cent to $16.1 million. The Q3 (ended June 30) saw new contract signings of $190 million and gross margin of 30 per cent, up from 25 per cent a year earlier and representing a new record for the company.

At the same time, management dropped its full fiscal 2022 guidance on revenue from a range of $580-$625 million, as stated with its fiscal second quarter financials in May, to now $560-$585 million. Adjusted EBITDA stayed the same at a projected $61-$65.5 million, while adjusted net profit actually went up from $41.5-$45.5 million to $44-$48 million. 

Speaking to the guidance revision, Calian CEO Kevin Ford said in the August 10 press release, “We have adjusted our revenue guidance for the final quarter of our fiscal year to reflect timing around larger revenue opportunities in the Advanced Technologies segment and slower sales in Health as the industry rebounds from COVID, which has been offset by better margin performance across the business allowing us to maintain our EBITDA and net profit guidance.” 

Calian’s share price had been up and down over 2021 but was sporting a 2022 year-to-date return of about eight per cent leading up to the fiscal Q3 report. Since then, the stock has dropped almost 14 per cent to sit at about negative six per cent year-to-date.

But Ezzat said the pullback represents a buying opportunity and reiterated his Top Pick status for CGY in his new report.

“We view the [fiscal third quarter] sales hiccup as a one-off with no bearing on our investment thesis and with no impact to both our short- and long-term EBITDA estimates. As such, we believe the recent share price weakness provides investors with an exceptional opportunity to consolidate a position in a quality operator with a solid track record of value creation. Recall, last quarter highlighted the Company’s exceptional free cash flow generating capabilities ($18.2 million in free cash flow for the quarter versus CGY’s current enterprise value of $585.1 million),” Ezzat wrote.

On why he’s bullish on Calian, Ezzat said the company has a resilient balance sheet, strong cash flow generation and a solid record of value creation through M&A and innovation. On the macro level, he said all of Calian’s business segments are in line to benefit from secular growth trends.

“Calian has a long history of execution, having nearly doubled revenues and EBITDA in the past three years, with CGY’s share price closely following suit. Notably, Calian’s fortress-like balance sheet, high-visibility revenues, and record-high share price put it in pole position to take advantage of shrinking market target multiples through M&A, which can materially improve Calian’s already solid fundamentals,” Ezzat said.

Ezzat thinks Calian will generate full fiscal 2022 revenue of $573.2 million, representing a 10.6 per cent growth rate, and moving to $659.3 million for fiscal 2023. On EBITDA, he is estimating $63.2 million for 2022 compared to $51.9 million in 2021 and moving to $68.9 million in 2023.

Ezzat commented on Calian’s acquisition earlier this year of US-based IT and cyber solutions provider Computex, a $38-million purchase, saying Computex expands the breadth of Calian’s IT and cybersecurity offerings while at the same time diversifying its customer base in adding 1,100 customers in healthcare, oil and gas and manufacturing.

“Through this acquisition, Calian has taken a significant step in achieving further expansion into the US market. At the time of the acquisition, Computex had last 12 months revenues/EBITDA of $75 million/$7 million, respectively. Of the $75 million in annual revenues that we expect the acquisition to add, $30 million is recurring in nature. We estimate Computex is a nine to ten per cent EBITDA margin business and foresee cost synergies to expand margins by 200-300bps within a year,” Ezzat wrote.

With the update, Ezzat reiterated a “Buy” rating on Calian Group and a price target of $85.00, which at press time represented a projected one-year total return of 54.0 per cent.