HS GovTech has a 150 per cent upside, says Echelon

Echelon Capital Markets analyst Mike Stevens maintained a “Speculative Buy” rating and C$0.80 per share target price on HS GovTech Solutions (HS GovTech Solutions Stock Quote, Charts, News, Analysts, Financials CSE:HS) in an update to clients on Thursday. Stevens said he’s encouraged by the company’s operational momentum as well as its recently reported cost savings.

HS GovTech, which develops and sells information and communication management systems for health inspection departments of federal, provincial, state and municipal governments in Canada and the US, provided a business update on Thursday, saying it’s had a strong start to the new year. 

On the company’s payments solution HSPay, its total processed volume (TPV) has so far in 2023 exceeded all of 2022’s TPV, and HS GovTech has on-boarded six new agencies since the start of the year with another six pending deployment over the last weeks of the first quarter.

The company said its realized cost saving achieved so far in 2023 amounts to an annualized $1 million and that it’s also seeing an increase in contracts executing through sole source procurement instead of the traditional Request for Proposal route, arguing that the change shows the strength and reach of the company’s platform.

“The regulatory agency market is continuing to increase the pace of procurements, especially when contrasted against the previous three years during the pandemic. Our business development team is attending a record number of conferences; a number of which we are delighted to be giving the keynote addresses at,” said CEO Silas Garrison in a press release.

HS GovTech also recently closed on an overnight marketed public offering and non-brokered private placement for gross proceeds of about $2.5 million, issuing about 6.8 million units comprised of one common share and one warrant entitling holders to one common share at an exercise price of $0.50 for a period of 36 months.

Commenting on the news, Stevens said he’s very encouraged by the impressive operational updates as well as the reported cost savings, while on the capital raise, he said although raising debt might have been the previously presumed route, the recent rise in the HS shares made an expedited equity offering a more realistic option.

“We are maintaining our previous price target of C$0.80 and Speculative Buy rating. We believe the capital raise, while dilutive, will help to remove any potential near-term funding overhangs attributed to the Company’s shares,” Stevens wrote.

“Our DCF is based on a 14 per cent discount rate and 8.5x EV/EBITDA terminal valuation multiple – both of which we view as relatively conservative and subject to revision with operational execution,” he said.

By the numbers, Stevens is estimating full 2022 revenue and EBITDA of $6.1 million and negative $3.8 million, respectively, which moves to 2023 revenue and EBITDA of $9.5 million and negative $1.7 million, respectively.

Stevens’ projected return to target at the time of publication was 150.0 per cent.