Constellation Software is still a Buy, says National Bank

Strong quarterly results have National Bank Financial analyst Richard Tse staying the course on Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU). In a Tuesday report where he reviewed CSU’s latest quarterly results, Tse maintained an “Outperform” rating and $3,000 target price on Constellation, saying the M&A market for this serial acquirer is looking great.

Headquartered in Toronto, Constellation Software acquires, manages and builds vertical market software solutions and has over 200 offices worldwide with over 12,000 employees in total. The company reported its first quarter 2023 financials on Monday, with revenue increasing 34 per cent year-over-year to $1,919 million including two per cent organic growth (five per cent in constant currency). Net income attributable to shareholders was $94 million or $4.44 per diluted share compared to $98 million or $4.63 per share a year ago. 

Over the quarter, the company said it made $718 million worth of acquisitions, including the acquisition of WideOrbit, for a 163 per cent increase over the Q1 2022, while its free cash flow available to shareholders increased by $129 million to $453 million.

Tse called it another textbook quarter for CSU, one representing the ninth in a row of positive organic growth (in constant currency), something the analyst called impressive given Constellation’s highly diversified businesses with limited revenue synergies.

“Bottom line, increasingly attractive valuations (for acquisitions) coupled with consistent positive organic growth (in CC) should make for a strong FY23 while a recurring cash flow base (FCF Yield 4.4 per cent) provides investors with some strong defensive attributes under a volatile market backdrop,” Tse wrote.

Tse said CSU’s capital deployment for the year is ahead of schedule. After using $718 million in the Q1, the company deployed an additional $262 million post-quarter’s end to bring the year-to-date number to $980 million, or 45 per cent of Tse’ estimate target of $2.2 billion. 

Tse said at this rate, Constellation would exceed its targets.

“With ~$1.6 billion in available liquidity, a low leverage ratio (Net Debt/EBITDA) of 0.6x and more attractive valuations, we think the deployment target to the implied consensus is achievable with a robust pipeline of over 40k potential targets,” he said.

“We believe that will require larger deals like the recent (large) acquisitions of WideOrbit and Allscripts’ Healthcare Assets (renamed Altera) that have come with those lower hurdle rates allowing for the pursuit of those larger deals given the heightened level of competition. Notably, during Constellation’s Annual Shareholders Meeting (on May 8, 2023), management stated that it is increasingly being invited to the table for larger deals,” Tse wrote.

At the time of publication, Tse’s maintained $3,000 target on CSU represented a projected one-year return of 14.2 per cent.