Tecsys is heading back to $40, says Laurentian

Patience is a virtue when it comes to stocks like Tecsys (Tecsys Stock Quote, Charts, News, Analysts, Financials TSX:TCS), according to Laurentian Bank Securities analyst Nick Agostino, who reiterated a “Buy” rating in a Thursday report, saying Tecsys is seeing strong growth in its Software-as-a-Service business as well as strong demand from its Hardware segment.

Tecsys, a supply chain management company for enterprise clients with proprietary software and third-party hardware, delivered its second quarter fiscal 2023 financials on Wednesday for the period ended October 31, 2022. The company posted total revenue up 11 per cent to $38.1 million and adjusted EBITDA down 13 per cent to $2.8 million. 

The company’s SaaS revenue grew by 34 per cent year-over-year to $8.8 million, while gross margin was a little lower at 44 per cent compared to 45 per cent for the same period a year ago.

Management touted the company’s new customer contracts, having notched seven across the fiscal Q2 and exemplifying traction across Tecsys’ vertical markets, according to President and CEO Peter Brereton.

“Among the new logo wins, we added two new hospital networks, as well as North American and international logos in our converging complex distribution market,” Brereton said in a press release. “In spite of challenging general economic conditions in the near term, we continue to see robust pipeline activity and strong demand. In light of this opportunity, we continue to invest to drive organic growth.”

Agostino said the $38.1 million topline was a beat of his forecast at $35.0 million as well as the consensus call at $36.2 million, while adjusted EBITDA at $2.8 million was also above Laurentian’s forecast at $1.4 million and the Street’s $1.8 million. Agostino noted that Tecsys’ License and Hardware revenue at $7.7 million was markedly higher than his estimate at $4.3 million.

Agostino said Tecsys’ pipeline remains robust, with strong demand across nearly all of its markets, singling out Healthcare and Retail as strong markets.

“Key Performance Indicators (sales, bookings, backlog) support strong Healthcare and Retail demand and solid market fundamentals, which reconfirm our investment thesis. Furthermore, we view increased [systems integrator] engagement favourably as it equates to quicker (SaaS) sales recognition and leads to higher overall margins long-term as confirmed by TCS on the call. This should drive valuation multiple expansion over time,” Agostino wrote.

With his maintained “Buy” rating, Agostino kept a $40.00 target price, based on 3.5x fiscal 2024 EV/Sales and representing a projected one-year return of 34.4 per cent.

“On a next 12 months EV/Sales, TCS trades at 2.7x versus peers at 3.1x (5.1x including outliers). We would be buyers on weakness,” he said.