TD Cowen launches coverage of Tecsys with a “Buy”

TD Cowen analyst John Shao says Tecsys’ (Tecsys Stock Quote, Chart, News, Analysts, Financials TSX:TCS) healthcare supply chain business gives the company a multi-year growth runway, with its SaaS valuation still underappreciated by the market.

As reported by the Globe and Mail, Shao initiated coverage of Tecsys with a “Buy” rating and $39.00 target. The average target is $38.63.

“Tecsys enjoys a strong reputation and word of mouth within the healthcare supply chain market, and we expect this to benefit its healthy growth profile driven by market share gains and ARPU growth,” Shao said.

The Montreal-based company provides supply chain management software, with a strong position in healthcare. Shao said Tecsys is building the foundation to become a larger Canadian supply chain and logistics software company, following a path similar to larger peers Descartes Systems Group and Kinaxis.

The analyst said Tecsys’ healthcare supply chain products could support up to a 23% annual recurring revenue compound annual growth rate, helped by market share gains and growth in average revenue per user.

Shao also sees room for margin expansion from new cloud infrastructure, better negotiating power with suppliers and economies of scale. As margins improve, he expects Tecsys’ valuation multiple to move closer to supply chain software peers.

He said Tecsys’ five revenue segments create complexity that obscures the value of its SaaS business, which has delivered a 33% five-year compound annual growth rate. He expects profitability to move toward SaaS-like gross margins of 75% from 64% today.

Tecsys trades at 2.2 times forward EV/sales, below supply chain management peers at 6.4 times and its historical average of 2.6 times. He values the company using a sum-of-the-parts approach, assigning a 5.0 times forward EV/sales multiple to the core SaaS business.

The analyst also sees a defensible takeout profile, with precedent transactions in healthcare and Canadian technology implying a four to five times next-12-month revenue multiple.

“In takeout scenarios, we see meaningfully higher implied valuations, driven by Tecsys’ scarcity value as a scaling, end-to-end sector leader,” Shao said.

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