Take a pass on Softchoice, says Laurentian

Canadian IT solutions provider Softchoice Corp (Softchoice Stock Quote, Charts, News, Analysts, Financials TSX:SFTC) looks like it’ll produce a solid third quarter, but at the moment it’s not enough to move the needle for Laurentian Bank Securities analyst Nick Agostino, who updated clients on the company in a Tuesday report and reiterated a “Hold” rating on the stock.

Ahead of Q3 results from Toronto-based Softchoice, due on November 10 before market open, Agostino said we can expect strong net sales growth across the board, forecasting $233.9 million in Q3 revenue for a year-over-year improvement of 17.6 per cent in organic growth compared to the consensus estimate at $225.9 million. (All figures in US dollars except where noted otherwise.)

Softchoice, which has a mix of Hardware, Software, Cloud and Professional and Managed Services, should see its Hardware business account for about 52 per cent of its revenue in the Q3, Agostino said, compared to about 45 per cent in the previous quarter, to $122.3 million, good for a year-over-year increase of 20 per cent. Software & Cloud revenue is projected at $83.8 million, up 15 per cent year-over-year and Services revenue should be up 15 per cent year-over-year, Agostino said.

On earnings, Agostino is expecting inflationary pressures and demand pressure from Enterprise customers to impact Softchoice’s EBITDA with flat margins.

“We look for $13.0 million in Adj. EBITDA (5.6 per cent margin), up 15.4 per cent year-over-year (at ~15 per cent of full-year EBITDA, similar to Q3/21) and slightly above consensus of $12.3 million (5.5 per cent margin) reflecting reduced full-year guidance of 25-28 per cent EBITDA margin as a percentage of GP due to tightened Enterprise spend, accelerated AE hiring and inflationary cost pressures partially offset by Project Monarch contributions. We model a ~11 per cent year-over-year increase in opex to $59.9 million to reflect higher personnel costs/count,” Agostino wrote.

As to the balance sheet, Agostino said it looks clean, with $78.8 million in net debt and cash from operations of $7.2 million and approx. $210 million available for M&A, made up of $9.7 million in cash and about $200 million off its $275 million revolver. 

On the stock, SFTC is currently down almost 39 per cent year-to-date, with Agostino reiterating in his report a “Hold” rating on the stock and $26.00 target price, which at the time of publication represented a projected one-year return of 50.9 per cent.

Longer-term, Agostino is estimating Softchoice will finish the 2022 year with revenue of $1,019.3 million and $84.5 million in adjusted EBITDA, to be followed by 2023 revenue of $1,108.0 million and EBITDA of $109.1 million.