Enghouse Systems is undervalued, RBC says

Following the company’s first quarter results, RBC analyst Paul Treiber has trimmed his price target on Enghouse Systems (Enghouse Systems Stock Quote, Chart, News, Analysts, Financials TSX:ENGH), but he still believes there is money to be made on the stock.

On March 10, ENGH reported its Q1, 2025 results. The company posted Adjusted EBITDA of $33.1-million on revenue of $124.0-million, down 2.9% year-over-year.

“Our strategic direction remains consistent and focused on long-term profitability and sustainability,” the company said. “We will continue to balance market demand by offering both SaaS and on-premise solutions and will not sacrifice profitability for revenue growth, which is reaffirmed by our ability to generate positive cash flows. Our robust cash position continues to allow us to capitalize on acquisitions that meet our thresholds and provide continued returns to our shareholders, also enabling us to increase our annual dividend for the 17th consecutive year.”

Treiber characterized the quarter.

“Despite negative organic growth, Q1 FCF rose 7 per cent year-over-year to $21-million, well above RBC [estimate] at $4-million,” he wrote. “Growth reflects solid deferred revenue, which was up 5 per cent year-over-year to an all-time high of $142-million. Q1 brings TTM FCF to $131-million, up 26 per cent year-over-year and the highest level in nearly 4 years (since COVID-elevated Q2/FY21). Even though organic growth was negative. Excluding hardware, constant currency (CC) organic growth was down 9 per cent Q1, in line with the negative 9 per cent in our model and stable with negative 9 per cent Q4. We believe post-acquisition normalization at Lifesize was similar to last quarter (down $4.4-million); excluding this normalization, we believe CC organic growth would have been negative 5 per cent, flat with Q4 and slightly below Enghouse’s 10-year average (negative 4 per cent), given the company’s shift to the cloud and challenging market conditions, particularly in the IMG segment. Our outlook continues to call for Enghouse’s organic growth to improve to negative 3 per cent by FY26.”

As reported by the Globe and Mail, Treiber March 14 maintained his “Outpeform” rating on ENGH while cutting his price target from $40.00 to $38.00.

“Enghouse is trading 57 per cent below peers and 40 per cent below its 10-year average,” the analyst added. “Enghouse has a strong track record of allocating capital at high rates. We believe risk-reward on the shares is attractive given Enghouse’s discounted valuation and our outlook for M&A to ramp over the next 12-18 months.”