Alithya Group: IA Capital launches coverage with “Buy” rating

Industrial Alliance analyst Neehal Upadhyaya likes what he sees from IT services provider Alithya Group (Alithya Group Stock Quote, Chart, New, Analysts, Financials TSX:ALYA)

In a research report to clients September 5, Upadyaya initiated coverage of ALYA with a “Buy” rating and on-year price target of $3.50, implying a return of 50.2 per cent at the time of publication.

The analyst says he thinks ALYA is on the cusp of a breakout.

“ALYA has been growing at a robust pace, supplementing its organic growth with a flurry of acquisitions, enabling greater scale and accelerating its path to double-digit EBITDA margins,” the analyst argued. “Over the past three years, the Company has grown at a CAGR of ~23%, with organic growth accounting for 5-27% per quarter between Q4/F21 and Q4/F23 before dipping below 0% last quarter. We are forecasting the Company to grow by ~2% in F2024 and ~6% in F2025. However, despite the softer F2024 revenue forecast, we are expecting considerable improvement to ALYA’s margin profile with Adj. EBITDA margins moving to ~8% in F2024 and ~9% in F2025, representing an ~80% increase since F2022. Our forecasts have plenty of upside as our top line is fairly conservative as global software and IT services – segments that comprise most of the Company’s revenues – are slated to grow ~8% and ~11%, respectively. Additionally, our estimates do not include future M&A, which should provide further growth, but more importantly, also help increase the Company’s margin profile.”

Upadhyaya thinks ALYA will post Adjusted EBITDA of $41.4-million on revenue of $534-million in fiscal 2024.

“Our target price is based on 7.5x our C2024E EBITDA estimate, which is well below the 10.0x its peers trade at,” he said. “While the stock has traded in a holding pattern of sorts, M&A results have not been reflected in the Company’s financials as quickly as investors would have liked, we believe ALYA has finally achieved scale and is on the cusp of a margin breakout that will lead to a re-rating of its stock price. With an experienced management team and several tangible cost reduction initiatives underway, we believe greater profitability, and in turn, greater FCF will allow Alithya to not only weather the poor macro storm in the near future but position it to take advantage of lower valuations in order to continue growing at an aggressive pace.”