Secular tailwinds, a defensive business model and profitability around the corner — those are some of the many pluses to Canadian Software-as-a-Service company HS GovTech Solutions (HS GovTech Solutions Stock Quote, Charts, News, Analysts, Financials CSE:HS) according to Echelon Capital Markets analyst Mike Stevens, who launched coverage on Wednesday with a “Speculative Buy” rating and $0.80 target price. Stevens says HS GovTech is hitting an inflection point in organic growth and should turn EBITDA-positive by the end of 2023.
HS GovTech is the former HealthSpace Data Systems, founded in 1998 and currently headquartered in Charlotte, North Carolina. The company develops and sells information and communication management systems for public sector health inspection departments in Canada and the United States, with its products including HSCloud for data management and HSPay, a mobile payment platform.
As Stevens describes it, HS GovTech had a slow 5.7 per cent CAGR in its early days as a public company, between 2015 and 2018, but since CEO Silas Garrison took the helm in September 2018 the company’s revamped operations have generated about 25 per cent organic CAGR between 2018 and the year-end 2022.
Stevens is forecasting another step up to about a 40 per cent CAGR over the next three years to 2025, while at the same time, Stevens argued that the company has already done much of the heavy lifting in terms of beefing up staffing, so it should be soon realizing considerable operating leverage, with the analyst forecasting EBITDA margins going from negative 63.0 per cent in 2022 to positive 15.4 per cent in 2025.
“We believe HS GovTech is in the midst of an inflection point that will see the Company ramp its top-line organic growth over the next several years while realizing significant operating leverage toward EBITDA profitability exiting 2023,” Stevens said.
Stevens also highlighted HS GovTech’s defensive attributes, where its government clients are less sensitive to macroeconomic factors and revenues are from long-term contracts from the company’s now-wide customer base of over 150 contracts with a plus-90 per cent retention rate.
On the secular tailwinds, Stevens said many public entities are still using obsolete systems and processes, while the pandemic has made more urgent the need to modernize.
On comps, Stevens estimated HS GovTech to be currently trading at 1.2x EV/Revenue and 1.5x EV/gross profit on forecasted growth of 57 per cent in 2023 compared to its Canadian SaaS peers at medians of 3.2x and 4.2x, respectively, on growth of 11 per cent. On the US side, the company’s peers trade at 4.6x and 6.8x, respectively on 12 per cent growth.
Finally, Stevens emphasized the takeout potential with HS GovTech, saying, “With continued execution against its sales pipeline, expansion into new government verticals, and as ARR gains further momentum toward crossing the $10 million+ threshold, the Company is likely to begin attracting attention and interest from the larger players in the space, which happen to be M&A heavy. Additionally, the Company hasn’t shied away from discussing the possibility of an eventual exit through acquisition on multiple occasions.”
At press time, Stevens’ $0.80 target represented a projected one-year return of 175.9 per cent.