HS GovTech keeps Speculative Buy rating with Echelon

An earnings beat is a positive for HS GovTech Solutions (HS GovTech Solutions Stock Quote, Charts, News, Analysts, Financials CSE:HS), but Echelon Capital Markets analyst Mike Stevens is taking a little more conservative approach to the rest of 2023. In a Wednesday report, Stevens renewed a “Speculative Buy” rating while lowering his target from C$0.80 to C$0.70, which at the time of publication represented a one-year potential return of 159 per cent.

HS GovTech has information and communication management systems for public health inspection departments in the US and Canada, including HSCloud, HSTouch, GovCall and HSPay. The Vancouver, BC-based company reported its first quarter 2023 financials on Tuesday, showing total revenue up 26 per cent year-over-year to $1.9 million and an adjusted EBITDA loss of $0.8 million compared to a $0.8 million loss a year ago. 

Subscription revenue for the Q1 was up 34 per cent to $1.4 million, while Professional Services revenue was flat at $0.5 million.

“We have accelerated growth and operational efficiency such that subscription revenue growth continues to outpace growth in expenses on a year-over-year basis,” said CEO Silas Garrison in a press release. “We expect to continue our strong pace of sales, with numerous contracts awarded and pending final execution.”

Stevens said the $1.9 million topline was better than expected, where the analyst had forecasted $1.7 million. The same goes for the EBITDA loss at negative $0.8 compared to Stevens’ forecast at negative $1.0 million.

The analyst believes the company will have slower Subscriptions revenue growth over the rest of 2023, based on timing of deals closing, while overall Stevens is more cautious due to the still-challenging small cap macro environment where access is tougher for the little guys.

“We believe it is prudent to take a more conservative forecasted growth ramp across 2023 to provide more of a timing buffer in getting deals closed (and thus converted into realized revenues) in what is expected to be a busy government procurement season for the Company,” Stevens wrote.

“We remain bullish on the Company’s overall trajectory in demonstrating cost discipline toward EBITDA positive results exiting 2023 while we are optimistic that the summer months of June through to September will see a pick-up in deal flow and announcements,” he said.

On a comps basis, Stevens has HS GovTech trading at 1.4x EV/Revenue and 1.8x EV/Gross Profit based on 2023 numbers, which compared to a group of 16 Canadian SaaS providers with median multiples of 3.8x and 5.1x, respectively.

Stevens thinks HS GovTech will generate full 2023 revenue and EBITDA of $8.5 million and negative $1.7 million, respectively, and 2024 revenue and EBITDA of $11.3 million and positive $0.4 million, respectively.