Tecsys is a Buy ahead of earnings, says Laurentian

Ahead of quarterly results upcoming from supply chain software company Tecsys Inc (Tecsys Stock Quote, Charts, News, Analysts, Financials TSX:TCS), Laurentian Bank Securities analyst Nick Agostino reiterated a “Buy” rating on the stock on Wednesday, saying a post-pandemic lull could make for flattish growth for the company.

Founded in 1983, Montreal-based Tecsys develops and sells enterprise-wide supply chain management software primarily to the North American market. Due to report its second quarter fiscal 2023 financials on November 30, Tecsys reported revenue up 11 per cent year-over-year to $30.4 million in its fiscal Q1, delivered in September. Adjusted EBITDA was down 40 per cent, however, to $1.5 million, with the company saying at the time that demand signals and buyer intent look good as companies turn more towards upping their game on supply chain management during the currently challenging period.

For Agostino, the road ahead appears to have its ups and downs for Tecsys, saying there will likely be tailwinds in its Complex Distribution and Healthcare verticals while headwinds are likely from Retail.

“We look for Healthcare to exhibit growth on sustained demand post pandemic peak (signed three new [Integrated Delivery Networks (IDNs)] in FQ1, although, with smaller IDNs with deal sizes slightly below the historical average of ~$750k) and improving CD sales as the prior log-jam in that market thaws,” Agostino wrote.

“We anticipate headwinds in Retail on slowing e-commerce as in-person activity increases. Amazon on its Q3/22 conference call noted an improving stock rate / delivery speed, however, highlighted that its “growth rate started to slow a bit,” he said.

By the numbers, Agostino is expecting fiscal Q2 sales of $35.0 million, with organic growth at two per cent year-over-year. He is calling for about 15 per cent organic growth from Tecsys’ Services with Cloud, Maintenance and Subscription segment to $17.0 million. 

On earnings, the analyst is forecasting adjusted EBITDA of $1.4 million, which would represent a 57 per cent year-over-year decline and reflect a 4.0 per cent margin, down 540 bps from a year earlier.

“The year-over-year decrease in EBITDA reflects increased investments in delivery capacity, R&D and S&M, partly offset by a lower hardware contribution (lower gross margin). That said, we model cash opex of $14.0 million versus $12.6 million, up ~11 per cent year-over-year, above our sales growth rate,” he said.

With his “Buy” rating, Agostino maintained a target price of $40.00, which is based on a 3.5x multiple of his fiscal 2024 EV/Sales estimate and at press time represented a projected one-year return of 29.4 per cent.