RBC trims price target on Enghouse Systems

As reported by the Globe and Mail, on Sept. 8, RBC Dominion Securities analyst Paul Treiber cut his target for Enghouse Systems (Enghouse Systems Stock Quote, Chart, News, Analysts, Financials TSX:ENGH) to $24.00 from $26.00 while maintaining a “Sector Perform” rating, citing continued weak organic growth and a need for more capital deployment on acquisitions.

Shares of the Markham-based enterprise software company fell 8.3% Sept. 5 after reporting third-quarter revenue of $126-million, down 4% year-over-year and below both Treiber’s $128-million forecast and the $130-million consensus. EBITDA dropped 15% to $32-million, missing the $34-million Street estimate. It marked the fourth straight quarter of revenue below expectations.

“The company’s restructuring ($3-million charge Q3) to align costs with revenues suggests near-term organic headwinds are permanent,” Treiber said. “Headwinds to organic growth remain similar to the last several quarters and include macro delaying new deals, post-acquisition normalization at Lifesize, and Enghouse’s ongoing premise-to-cloud transition. Customer churn is not being offset by new bookings.”

Despite the organic challenges, he noted Enghouse continues to generate healthy free cash flow, $115-million over the last 12 months, and holds $259-million in net cash. However, the company has only spent $33-million on acquisitions over the same period, with its last deal being Trafi in April, and repurchased just $11-million in shares.

“An increase in capital deployment is needed,” Treiber said. “Management indicated the company has a robust M&A pipeline and anticipates an increased pace of acquisitions going forward. We believe that Enghouse deploying more capital on acquisitions or share buybacks could act as catalysts for the stock.”

At current levels, he sees valuation “near trough,” noting the stock trades at 6.9 times next-12-month estimated EV/EBITDA, well below peers and its historical average. But he cautioned that the discount may persist until the company demonstrates stronger M&A activity or improved organic growth.

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