IMPORTANT: Click here to obtain the Investment Thesis generated, where you can find all the calculations, ratios, forecasts, graphs, evaluations, and other data of interest presented in this post.
Quantitative analysis:
- Search for long-term trends.
- Historical evolution of the company.
- Analysis of individual items (Revenues, Balance Sheet, Profit and Loss Statement, Cash Flows).
- Ratio analysis.
- Projections of future growt
- Progress recommendations.
Qualitative analysis:
- Business strategy, organizational structure, competitive advantages, management, qualities of its products and services, etc.
- Sector analysis
- Macroeconomic analysis
Enghouse Systems Ltd. is located in the Canadian market, offering enterprise software solutions in future growth sub-sectors, seeking to generate greater opportunities in its expected profitability.
Enghouse has outstanding intangible characteristics, enjoying high competitive advantages, pricing power, resilience to crisis, high replacement and entry costs to the sector, scalability in its business model, good management of its board, light on assets, etc.
The business’s main strategy is focused on acquiring companies with recurring cash flows in order to finance new acquisitions.
In terms of the company’s accounts, Enghouse is in a sound financial position, with very profitable ratios, as well as strong growth in operating margins and cash flow generation.
The most deficient aspect of the company is its sales growth, as it does not present a double-digit performance, giving us an idea of the level of demand presented by the company.
However, the estimates made in this test show an upward trend in practically all the variables analyzed, so that, even having shown a conservative approach, Enghouse presents a high potential for market revaluation, having obtained, in practically all the methodologies used, a target price above its market value.
The viability of its business model can also be corroborated, with particularities that set it apart from its competitors, both qualitatively (pricing power, anti-cyclical sector, high replacement costs, etc.) and quantitatively (returns on capital obtained, high cash generation, goodwill, etc.).
Moreover, these results have been obtained without financing its operations through debt, since the balance sheet does not contain any item that uses debt to justify the company’s good performance, demonstrating once again the high potential offered by the company for the coming years.
The company’s intangible assets are also really high, generating competitive advantages that make the company a very interesting option to take into account.
It also stands out for its efficient capital allocation, which is reflected in the generation of very positive cash flows, which, through its inorganic growth strategy, will be reinvested back into the organization in the form of acquisitions.
Likewise, the characteristics shown by the sector offer the possibility of obtaining a really interesting market, with great opportunities to enter segments that have not been seen until now.
For all these reasons and according to the stipulated projections, we can confirm the undervaluation of the company, presenting a target price above the company’s share price as of December 31, 2021.
For its study, we have proceeded to alternate different valuation methods, in order to minimize risks in its estimation, trying to understand the different peculiarities that connect the qualitative variables of the action strategies carried out by the company.
In this way, it has been possible to project results in line with the company’s historical growth line, using methodologies such as valuation by ratios, discounted cash flows, valuation multiples and long term technical analysis.
The valuation by ratios both in the company’s history and the one established for the year 2025 is really positive, whose levels, according to our estimated projections, present an exceptional long-term financial health.
The valuation by multiples has shown an undervaluation of the company with respect to its competitors in all of the approaches used.
Likewise, after projecting profits in accordance with the growth policy stipulated by the company, an average future yield of 15.35% has been obtained, showing the potential market revaluation that the company could experience.
On the other hand, as for the discounted cash flow method, the estimated target price also exceeds its market value, obtaining again a real price above its quoted value.
Finally, in terms of technical analysis, once this undervaluation in the share was known, we proceeded to determine whether this was a good time to enter the market, focusing on the long term and obtaining a potential entry signal in most of the variables analyzed.
As a result, Enghouse’s share price is likely to revalue as of December 31, 2021, after presenting characteristics that make the company a viable choice for long-term recurring profits.
