The stock made significant gains in the fourth quarter of 2023, but Echelon Capital Markets analyst Amr Ezzat thinks there is still good money to be made on Tecsys (Tecsys Stock Quote, Chart, News, Analysts, Financials TSX:TCS).
In a research update to clients January 9, Ezzat said TCS is among the very best companies a Canadian tech investor could discover.
“We are anointing Tecsys as a top pick,” the analyst said. “Tecsys has ended the quarter 17.7% higher, yet the shares still continue to trade ~51% 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. As we detail below, we believe this presents an opportunity to accumulate shares in a company with exceptional earnings growth.”
Ezzat Tuesday maintained his “Buy” rating and price target of $45.00 on TCS, implying a return of 44.9 per cent at the time of publication.
For those investors who break down the company’s numbers and arrive at the conclusion that this is not a cheap stock, Ezzat says some more digging is required.
“How can a 33.5x EBITDA multiple stock be inexpensive? We believe using an EBITDA/earnings multiple on short-term earnings estimates significantly (and incorrectly) undervalues Tecsys shares as it gives no recognition to the Company’s evolving margin profile,” Ezzat wrote. “Case in point, at the date of writing, the Street has TCS’ NTM EBITDA margin at 7.0% versus our estimate of 17.5% in F2028. So how would “slapping” a multiple on short-term earnings ever yield a correct “fair value”? Based on our long-term normalized EBITDA margin assumptions, we believe the Company currently trades at a normalized EBITDA multiple of ~7.5x “…We benchmark Tecsys to two sets of peers: supply chain/logistics enterprise software and SaaS players as well as Canadian software and high visibility players. Tecsys looks attractive on a sales and gross profit multiples basis. An interesting metric we highlight in our comparables benchmarking analysis is EV/LTM gross profit; Tecsys trades at 5.8x versus the peer median of 9.5x, a steep 38.7% discount.”
The analyst says TCS played the long game and is poised to reap the benefits.
“In our opinion, any potential acquirer of Tecsys will evaluate the Company’s takeout merits on this basis due to the expected significant opex synergies,” he argued. “The valuation disconnect would make Tecsys accretive to a lot of players in our comparables set. The valuation disconnect between the gross profit and EBITDA multiples underscores the point we’ve highlighted earlier: the Company sacrificed short-term profitability in favour of consolidating a dominant position within the healthcare vertical as well as its SaaS offering, however, with management geared towards focusing on margin expansion, we believe its valuation still remains inexpensive on a long-term EBITDA multiple basis. We derive our valuation using a long-term DCF (discount rate: 12.0%, growth: 4.0%).”
Ezzat thinks TCS will post EBITDA of $9.1-million on revenue of $173.7-million in fiscal 2024. He expects those numbers will improve to EBITDA of $17.1-million on a topline of $193.2-million the following year.
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