OpenText has an 83 per cent upside, says National Bank

The defensive attributes of OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials NASDAQ:OTEX) were on display in its just-released quarterly earnings, according to Richard Tse, analyst for National Bank Financial. Tse delivered an update to clients on Thursday where he maintained an “Outperform” rating on the stock, saying investors need to have faith in the company’s historical playbook with regards to its new purchase of Micro Focus.

Waterloo, Ontario-based enterprise information management software company OpenText released on Thursday its second quarter fiscal 2023 financials for the period ended December 31, 2022. The results featured revenue up 2.4 per cent year-over-year to $897 million and adjusted EBITDA down 0.8 per cent to $340.9 million. (All figures in US dollars.)

“OpenText delivered a superb second quarter with strong cloud bookings and revenues, establishing our eighth consecutive quarter of cloud organic and ARR organic growth in constant currency,” said Mark J. Barrenechea, OpenText CEO & CTO, in a press release. “Customers embraced our Cloud Editions as reflected with Cloud revenues of $409 million, growing 12.0 per cent year-over-year or 16.0 per cent in constant currency.”

The fiscal Q2 revenue and EPS were beats of analysts’ estimates, with the $897 million in revenue coming in ahead of the consensus call at $871 million and Tse’s estimate at $884 million. Adjusted EPS of $0.89 per share was also better than the Street and National Bank, both at $0.78 per share.

Tse called the Q2 results impressive considering the macro backdrop, but he also argued that the strong results “reflect the cumulative performance from years of (many) acquisitions,” a nod to the recently closed Micro Focus acquisition, one which appeared to have generated skepticism in some corners when first announced last summer.

Tse said the $5.8 billion Micro Focus ticket price implies an EV/trailing 12 months sales of 2.3x and EV/trailing 12 months EBITDA of 6.7x, both attractive in comparison to previous OTEX transactions for companies like Zix, Carbonite, Documentum and GXS. 

Tse argued that OpenText has a long history of de-levering quickly once a major acquisition has been made.

“The reality is that to own the stock requires some belief that this acquisition will not be an anomaly from a successful acquisition track record. Based on our diligence, we think it provides such an opportunity, but the reality is that it will take a few quarters to show in the results,” Tse said.

“Bottom line, we see a lot of untapped value in OTEX; at 8.2x EV/EBITDA (F24-Jun), we see a firm de-levering path benefiting the equity holder,” Tse said.

With his “Outperform” rating, Tse maintained a 12-month target price of $60.00, representing at press time a projected return of 83.3 per cent.