Stock markets in general have cooled compared to the fervour early this year, but some companies are destined for a comeback and continue to offer stunning results despite recent share price weakness.
Echelon Capital Markets analyst Amr Ezzat in Montreal argues that his “top pick” (equivalent to a “best buy”), Calian Group Ltd. (TSX—CGY), is just such a company.
Mr. Ezzat is a managing director of equity research at Echelon, which he joined in 2014 and where he is responsible for technology and special situations research. The analyst asserts that shaky share prices “provide investors with an exceptional opportunity” to buy into Calian.
Calian Group is a technology and training services company. Since 2019, it has operated four business segments: IT and cyber solutions, health, learning, and advanced technologies. It operates mainly in Canada and Europe. The health segment manages medical-related properties and provides a range of primary care and mental health services as well. The IT segment offers technical infrastructure for businesses, cybersecurity services, and even an “XaaS” (everything as a service) solution to enable remote business operations. The learning segment trains military and emergency response personnel. Advanced technologies include satellite communications and nuclear safety.
Continuous impressive results
Mr. Ezzat highlights the company’s history of consecutive impressive results, which he argues cements its reputation as a “resilient, secular compounder.”
The quarter ended June 30 (the third in Calian’s 2022 fiscal year) continued the trend; the company reported record quarterly revenue of US$150 million, 10 per cent year-over-year, on Aug. 8. Calian also achieved a record quarterly gross margin of 30 per cent in the period, compared to 25 per cent 12 months earlier.
“Calian is a quality diversified operation with a resilient balance sheet, strong cash flow generation capabilities, and a solid track record of value creation through both M&A (mergers and acquisitions) and innovation,” the analyst says.
“Each of Calian’s segments stands to benefit from secular growth trends. Calian has a long history of execution, having nearly doubled revenues and EBITDA (earnings before interest, taxes, depreciation and amortization) in the past three years, with CGY’s share price closely following suit.” It reported adjusted EBITDA of $16.1 million for the third quarter, up eight per cent year-over-year.
Kevin Ford, the company’s CEO, said in an Aug. 8 statement on the results, “Many of our concerted efforts to diversify our customer base beyond Canada and enter new marketss with more differentiated offerings demonstrated some of their early returns.” (Revenue from outside Canada increased to 33 per cent of the total in the third fiscal quarter.)
Balance sheet protected like a fortress
Mr. Ezzat says, “Notably, Calian’s fortress-like balance sheet, high-visibility revenues, and record-high share price put it in pole position to take advantage of shrinking market target multiples through M&A, which can materially improve Calian’s already solid fundamentals. The analyst says that the company’s long history of growing through successful takeovers warrants extra credit in his valuations, despite not knowing how large those transactions will be or when they may occur; he likens any such predictions to “throwing darts in the dark.”
“We recognize the difficulty in modelling M&A contribution in forecasts, but we still believe it sensible to reflect M&A in our valuation. As such, we believe Calian’s future earnings power is grossly underestimated. We are comfortable enough with the Company’s track record of executing accretive transactions to give CGY some future inorganic growth benefit.”
Pointing to a representative example, Mr. Ezzat explains that last January, Calian announced the acquisition of U.S.-based Computex Technology Solutions for $38 million. Operating under multiple brands and in operations for the previous 30 years, it delivers services and products like data centres, unified communications, cloud computing, hardware, and software to business clients of all sizes.
“Computex expands the breadth of Calian’s IT and cyber solution offerings while diversifying its customer base, adding 1,100 customers in health care, oil-and-gas, and manufacturing,” says the analyst, who also commends the latter’s further expansion into the United States market.
“We estimate Computex had LTM (last-12-months) revenues and EBITDA of about $75 million and $7 million, respectively. Of the $75 million in annual revenues that we expect the acquisition to add, $30 million is recurring in nature.”
Mr. Ezzat calculates a fair value (and target price) of $85 a share for Calian.
This is an edited version of an article that was originally published for subscribers in the September 2, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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