This tech stock is “remarkably inexpensive”, analyst says

Beacon Securities analyst Doug Cooper maintained his “Buy” recommendation but cut his price target on NTG Clarity Networks (NTG Clarity Networks Stock Quote, Chart, News, Analysts, Financials TSXV:NCI) to $3.75 from $5.00, saying the company’s third-quarter results underscored strong revenue momentum but also highlighted pressure on margins and working capital.

In a report dated Nov. 17, Cooper said NTG continues to post “strong revenue growth but a build-up in infrastructure (ie, employees) which led to an EBITDA margin shortfall,” a pattern he also noted last quarter.

NTG reported Q3 revenue of $20.9-million, up 42% year over year and 10.6% sequentially, driven by $10.2-million of offshoring work, an 89% increase from Q2 and 23% higher year over year. Software revenue (NTGapps) rose to $2.1-million from “essentially zero” last year, but was down roughly 50% sequentially, pulling gross margin down to 35.5% from 38.6% in Q2. EBITDA margin fell to 11.9% from 14.8% last quarter and 21.7% a year ago as overhead costs rose 9% sequentially and doubled year over year. Despite the pressure, NTG produced EPS of $0.04, equal to a 9% net margin, which Cooper said demonstrates strong flow-through from EBITDA.

Working capital was a focal point, with accounts receivable rising to $30.6-million from $23.3-million in Q2 and $17-million at year-end 2024, a jump that weighed on cash flow. NTG ended the quarter with $6.6-million in cash, $1.5-million in net cash and $25-million of working capital.

Cooper said the company’s ability to collect its receivables is critical but noted that NTG “has never experienced material bad debts” and that most A/R is owed by Saudi banks and system integrators tied closely to government entities. He said that long payment cycles are typical in the Middle East and remains confident the amounts will be collected.

Cooper’s outlook hinges on three questions: whether Saudi Arabia’s spending environment remains strong under its US$1.3-trillion Vision 2030 program; whether NTG can secure new contract wins to reverse a decline in backlog from $100-million in Q2 to about $88-million; and whether the company can collect its A/R. He believes the answer to all three is yes, with cost-focused contracting potentially benefiting NTG’s Egyptian outsourcing operations and management indicating it is the front-runner on several sizable proposals. He said overhead now supports more than $100-million of revenue, giving the company operating leverage once new wins materialize.

Cooper called NTG’s valuation “remarkably inexpensive”. Based on the company’s updated fiscal 2025 guidance, maintaining revenue of $78-million and revising its EBITDA-margin range to 12%–16% from 16%–20%, NTG trades at 0.7 times sales and 5.4 times EBITDA.

For fiscal 2026, where Cooper forecasts revenue of $94.9-million and EBITDA of $17.2-million (down from $18.5-million previously), he said the stock trades at 0.6 times sales, 3.2 times EBITDA and five times earnings. He maintained his Buy rating while lowering his target based on 10 times his fiscal 2026 EBITDA forecast.

He noted the stock is also trading at about two times working capital, implying the market doubts NTG’s ability to collect its receivables. By comparison, he said CGI trades at two times sales and 9.5 times EBITDA despite having no exposure to the Saudi market, which he expects to outpace developed-market IT spending significantly.

Cooper expects NTG to generate Adjusted EBITDA of $10.2-million on $78.1-million of revenue in fiscal 2025.

-30-