RBC lowers price target on Enghouse Systems

RBC Dominion Securities analyst Paul Treiber says poor sentiment toward software stocks, weak organic growth and limited capital deployment are likely to keep pressure on Enghouse Systems’ (Enghouse Systems Stock Quote, Chart, News, Analysts, Financials TSX:ENGH) valuation.

As reported by the Globe and Mail, on June 11, Treiber lowered his target on Enghouse to $18.00 from $20.00 and maintained his “Sector Perform” rating. The average target is $18.50.

“Enghouse’s sustained negative organic growth and limited capital deployment are likely to weigh on valuation,” Treiber said.

Shares of the Markham, Ont.-based software company fell 9.1% Wednesday after it reported second-quarter revenue of $114.3-million for the period ended April 30, down 8% year-over-year but ahead of the Street at $112.9-million. Adjusted EBITDA fell 7% to $26.0-million, below consensus at $31.0-million.

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Treiber said “organic growth deteriorated, capital deployed remained light and profitability declined.”

The analyst estimates constant-currency organic growth was negative 13% in Q2, worse than his negative 11% forecast and down from negative 12% in Q1. That was also below Enghouse’s 10-year historical average of negative five%.

Treiber estimates AMG organic growth improved to negative nine% from negative 12% last quarter, while IMG deteriorated to negative 15% from negative 12%, driven by delayed new deals, customer churn and the ongoing shift from licence revenue to SaaS.

Maintenance revenue fell eight% year-over-year, worsening from a four% decline in Q1. Treiber lowered his organic growth forecasts to negative 12% for fiscal 2026 and negative eight% for fiscal 2027.

He also cut his Adjusted EBITDA margin forecasts to 24.1% for fiscal 2026 and 25.1% for fiscal 2027, from 26.1% for both years, citing negative operating leverage.

“Negative operating leverage weighs on profitability,” Treiber said.

Treiber said Enghouse trades at 5.7 times next-12-month EV/EBITDA, 13 times next-12-month earnings, a 12% free cash flow yield and a 7.7% dividend yield, all near 10-year lows.

“We believe M&A needs to ramp and organic growth needs to stabilize for investor sentiment to improve,” he said.

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