TCS stock has an upside of 47%, Echelon says

It’s been a notable name in the Canadian tech sector for some time, but Echelon analyst Amr Ezzat says there’s still money to be made on Tecsys (Tecsys Stock Quote, Chart, News, Analysts, Financials TSX:TCS).

In a report to clients November 27, Ezzat initiated coverage of TCS with a “Buy” rating and one-year price target of $45.00, implying a return of 46.9 per cent at the time of publication.

The analyst says those who remember a TCS from years back will discover a company that bears little resemblance.

“Reflecting a story of transformation, Tecsys is undergoing a significant change as it continues to shift away from an on-premise model to a SaaS model,” Ezzat argued. “The stock has more than doubled in the last five years as sales growth dramatically accelerated (average organic growth of 1.1% in F2017-2019 vs. 19.3% in F2019-2023). Yet, the shares continue to trade ~50% lower than February 2021’s all-time high as margins compressed (13.2% EBITDA margin in F2021 vs. 6.2% in F2023) and tech sector valuation levels deflated from the COVID hysteria period.”

Ezzat thinks TCS will post EBITDA of $12.4-million on revenue of $175.1-million in fiscal 2024. He expects those numbers will improve to EBITDA of $17.6-million on a topline of $194.1-million the following year.

The analyst thinks what TCS has started it will continue, and its shareholders stand to reap the benefits.

“Revenues have seen consistent annual double-digit growth since F2020, up from the previous anemic organic growth profile, highlighting the Company’s ability to capture market share and continue to expand its customer base,” he wrote. “The surge in sales velocity can be attributed to the vulnerabilities in global supply chains that were exacerbated by the COVID-19 pandemic. This has heightened the demand for comprehensive, end-to-end integrated SaaS supply chain solutions. All fundamentals point to sustained momentum going forward. The Company’s SaaS bookings (SaaS Remaining Performance Obligation (RPO) as we highlight in Exhibit 3) were up ~36% y/y to $139.4M in FQ124. RPO serves as a leading indicator of future revenues by representing contracted, yet-to-be-recognized revenues, signalling a strong revenue pipeline and customer commitments. Over the past three years, RPO has experienced a remarkable CAGR of 34.7%. While SaaS typically generates lower initial revenue, the silver lining in the strategic shift lies in the creation of a stable, visible, growing recurring revenue stream. We forecast sales to grow ~13% on average over the next two years and anticipate an acceleration thereafter.”