OTEX stock is undervalued, National Bank says

It had an up and down 2023 but 2024 should be a good one for Open Text (Open Text Stock Quote, Chart, News, Analysts, Financials NASDAQ:OTEX), says National Bank Financial.

In a comprehensive look at 2024, analysts Richard Tse and John Shao picked some of their favourite stocks, and Open Text made the cut.

“If you’ve been following this name, you’d know the stock declined sharply following the acquisition of MicroFocus (MF) care of a heightened risk profile given a post-close leverage ratio (Net Debt/EBITDA) of 3.8x under concerns that MF had negative growth,” Tse and Shao wrote. “While our expectation was that OpenText was on-course to de-lever its balance sheet – the Company has moved to accelerate that pace via a definitive agreement to sell its AMC business (acquired via MF acquisition) to Rocket Software (Bain Capital portfolio company) for $2.275 bln in cash with the proceeds being used to repay its debt. Post-close (expected by June 30, 2024) we estimate OTEX will have a leverage ratio of approx. 2.5x. And at 8.5x EV/NTM EBITDA (historical average 9.6x) we think the risk-to-reward continues to be compelling.”

In the research update, National Bank maintained its “Outperform” rating and price target of (US) $60.00 on OTEX.

“Bottom line, investors following our research will know OTEX remains one of our favourite “legacy” names,” the analysts wrote. “It’s also one we’ve been touting as notable in the current environment. Profitability and strong recurring cash flow offer investors compelling defensive attributes. We see a growing base of recurring revenue through opportunistic acquisitions, expanding operating leverage and optionality from organic growth (7 consecutive quarters of positive organic growth in CC) that is not fully reflected in its current stock price. We maintain our Outperform rating with a price target of US$60 (unchanged) which implies an EV/EBITDA multiple of 10.9x on FY24E (unchanged).”