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.

• Qualitative analysis
  • Business strategy, organizational structure, competitive advantages, management, qualities of its products and services, etc
  • Sector analysis
  • Macroeconomic analysis

• 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 growth
  • Recommendations
• Final valuation

Analysis Enghouse Systems Ltd.

Highlights and business strategy

Enghouse Systems was founded in Ontario – Canada, in 1984, whose share price can be seen on the TSE “Toronto Stock Exchange”.

Enghouse offers enterprise software solutions linked to those areas with the highest future revenue generation (remote work, visual computing and communications for enterprise software), catering to as many vertical markets as possible, diversifying, and expanding through its acquisition strategy.

The company contains a large number of associated brands under vertically integrated software, focusing on specific markets, such as transportation, telecommunications, contact centers, civil security, videoconferencing, etc.

Enghouse operates across different international markets, with greater relevance in more developed countries, generating greater investment opportunities and diversifying geographically to reduce potential risks.

Through “Table 1”, we can see how the company’s geographic revenues are very remarkable, generating only 5% of turnover in its country of residence, with other markets being more relevant, being the American one the most remarkable.

The company focuses its main strategy on inorganic growth, acquiring companies that provide specific types of software in high-growth sectors, with the aim of developing their growth potential and expanding their profit margins.

Once a new brand name is integrated, Enghouse seeks to grow its product and service offerings, resulting in increased revenues generated by the company, and by establishing strategic alliances to achieve market synergies.

Growth strategies

Enghouse has two strategies to generate value for the company, through acquisitions financed by its operating cash flows, as it does not use financial debt, and by increasing its recurring revenues (organic growth).

Inorganic growth

Enghouse management’s main development path consists of growth through acquisitions.

Through this strategy, the company seeks to locate companies that can generate recurring revenues in the future, expand its margins, and try to increase the group’s brand value in the different vertical markets in which it operates.

Due to the history presented by the company, we can sustain the good integration presented by the acquired companies, supported by a constant improvement in the company’s operating margins, which we will see below.

Enghouse uses the “Buy&Hold” strategy, preserving every acquired company with the objective of developing its productivity and improving its margins, producing a high capacity in synergy generation after its good track record in the execution of acquisitions.

A very positive aspect to take into account is its low capitalization, as Enghouse is able to obtain greater investment opportunities due to the existence of a large number of smaller companies, with an average acquisition cost of 15 million Canadian dollars.

The characteristics that any company must have before carrying out any acquisition must be:

• Low sales margins (between 5 to 50 million dollars).
• High and recurring revenues in the “maintenance income” line.
• Companies located in developed countries and with high geographic expansion.
• Growth sectors with high barriers to entry.
• Companies with positive cost synergies.

The fact that a company is not profitable at the time of purchase is not an impediment for the management, as the potential return that the company could generate is considered more important.

This fact could be of concern to any investor and could be considered alarming if the company fails to generate the expected returns.

However, Enghouse’s track record supports the company, as of the more than 45 acquisitions that have taken place in the last 18 years, the company has not liquidated any of them, demonstrating the management’s confidence in its decisions.

As for the management of acquired companies, Enghouse is committed to flexible management teams, offering the board the possibility of staying on and helping the company to grow, or resigning partially or completely from its management.

Examples of some of the companies with such features are Altitude Software (a software services company in the field of call center integration and customer loyalty software) or Diagolic (a leader in cloud-based video conferencing, with an astonishing 0.85X sales outlay).

Organic growth

Among the revenue items obtained through its production cycle are “Maintenance revenues”, “Software licenses”, “Professional services” and “Hardware sales” (which we will see in greater depth in the “Revenues” section).

It is the item “Maintenance revenues” that is most important for the group, since through this item, the management seeks to generate recurring cash flows in order to finance new acquisitions.

Revenues under the heading “License revenues” come from monthly or annual fees collected for the sale of products and services offered by the company.

Revenues under the heading “Professional services revenues” include services associated with the installation, implementation and configuration of services, which are produced in a similar proportion to software licenses (hence the similar growth).

As for the cash inflow from “Revenue from hardware sales”, it is composed of those components that complete the software offered by Enghouse to its customers.

Considering another approach to the company’s development, Enghouse has other objectives such as the expansion of its range of products and services offered, and the acceleration of investments in disruptive technology in high-growth sectors.

Generally speaking, we can see the virtuous circle that the company presents, trying to locate investment opportunities in acquisitions, to expand its cash flow margins and to finance new acquisition opportunities with these cash flows.

Historical evolution

The development presented by the company over the years has been truly exponential, going from a price of 3.94CAD on March 13, 1998, to 52.94CAD on January 1, 2022, with a historical annualized return of 11.43%, and presenting a growth of 23.64% in its last 12 annuities.

Through “Illustration 1”, we can see the growth rate exhibited by the company, having already normalized its growth levels after discounting the levels carried out after the “rally” of 2020, due to the tailwinds produced by the increase in the demand for software services after the generalized confinements.

However, after breaking sales records, the market situation in 2021 has changed, with demand for remote services declining, directly affecting Enghouse’s trading price, falling from 77.55CAD on July 11, 2020, to 52.94CAD on January 1, 2022.

In addition to this fact, this drop has been influenced by the interest rate hike presented by the central banks for the coming years, and the overvaluation of the market.

Analyzing Enghouse’s behavior in low seasons of economic growth, we can confirm the resilience shown by the company in times of crisis, a fact justified by the dependence on the software services offered to its customers, and the growth based on acquisitions.

As for the software services offered by the company, these are basic needs, as every company must continue its activity, and therefore pay the fees set by Enghouse, with no major impact on the company’s revenues.

The only exception would be if its client companies were to close due to losses, reducing the number of subscriptions and revenues generated by Enghouse.

However, this is where acquisitions come into play, as such losses are offset by increasing acquisition opportunities at lower multiples, allowing them to pay less on their acquisitions and maximizing their profitability margins going forward.

The only events that adversely affected Enghouse’s share price were:

• Crisis 2007; Enghouse saw an 11% reduction in revenue attributable to the contract termination of one of its major customers, turning over 1.5 million of Enghouse’s 7.8 million total in that period.
• Crisis 2008 to 2010; Decrease in sales of 4%. The company made 3 acquisitions that same year, generating new opportunities for future growth.
• Crisis 2021; Loss of 7.26% in company revenues, justified by the exponential growth presented in 2020. Again, the company undertook three acquisitions, including Altitude Software, a strategic move for the company.

The company has demonstrated great strength in its accounts after its historical

Operational groups

The company is comprised of two business segments, through which it seeks to develop business-oriented software.

Interactive Management Group or IMG. It provides customer interaction services, as well as telework facilitation services, call management services, communication services, and artificial intelligence services through the use of chatbots. The group is divided into two areas which try to support each other:

• Enghouse Interactive, dedicated to software oriented to “Call Centers”, improving their performance to provide greater support to those companies that present technical problems, management, or any other issue in the services purchased.
• Enghouse Vidyo, providing video call communication software, trying to develop visual communications through scalable technology and cloud services, being the tele-health and financial sectors the most influential.
  Asset Management Group or AMG offers software technology solutions to different industries, such as defense and public safety providers, transit, cable operators… Also divided into two areas:
• Enghouse network, which aims to improve the efficiency, connectivity and digitization of companies in areas such as online software, media, etc. They are usually aimed at public services and defense organizations that intend to adapt to the current digital transformation, through networks such as Cloud service, 5G or Artificial Intelligence.
• Enghouse transportation + public safety, with functions related to security, and freight transportation, developing software solutions to transit companies, supply chains and public safety, according to the management in their logistics operations and transport payments.
  Group

Vidyo Group

Within the range of companies acquired by the Enghouse company, the Vidyo group is the most important division, being one of the largest acquisitions made for a value of 40 million Canadian dollars as of 2019.

Currently, the company is turning over approximately C$60 million, thus showing us the potential growth of the company, generating a return of C$20 million in just one year.

Vidyo has become one of the most important segments of the parent company, developing video software solutions with the aim of minimizing companies’ bandwidth, making their visual communications thrive.

The company’s performance has been influenced due to the pandemic crisis, experiencing a growth in its offerings of 1350% (in just one year), due to the boom in real-time web communications generated in confinements.

Therefore, although the results were due to a random event, it manages to explain the quality of the acquisitions achieved by Enghouse, having managed to obtain a fundamental role in supporting the health sector during the pandemic.

In addition to Vidyo, Enghouse has bet on other very reputable companies such as Dialogic, Especial Group, Nebu BV, Momindum SAS… trying to increase the group’s profitability margins.

For all these reasons, Enghouse offers a policy geared towards developing sectors, as in the case of the acquisition of Vidyo and the growth experienced in the face of the boom in teleworking and online communications in recent years, with growth rates of 500% in web conferencing and video platforms at 265%.

Management team

Enghouse is led by Stephen Sadler, CEO of the company, considered one of the most influential technology executives in Canada, with a remarkable academic record (honours degree in Industrial Engineering and an MBA from York University).

Stephen Sadler is a venture capital manager, whose trajectory goes through 5 different companies, receiving awards for being considered a very experienced person in the sector, disciplined and with a long-term vision.

As a transcendent aspect to highlight, Stephen Sadler managed to bring the company Geac Computer Corporation out of receivership through inorganic growth, turning it into an important international software company in the country.

As for management’s management, one of the methods for analyzing the correct allocation of capital is to analyze the increase in profits for each monetary unit of retained earnings for the same period.

Considering this aspect, the net profit as of December 2021 is 92.79 million CAD, together with the retained earnings generated by the company in the same period, 355 million CAD, we obtain a return of 26.14% for each dollar retained. In other words, the board is managing to generate an extra CAD 1.26 profit for every dollar invested in the company, generating high shareholder value and confirming the company’s formidable capital allocation.

“We have always had some companies that require higher valuations. If they don’t meet our financial criteria, we simply pack our bags. Many of those companies are still available. So often when people say, yes, the numbers are higher, et cetera, they’re justifying paying more or justifying not doing the homework.” (Steve Sadler, Conference Call Q3 2020).

On the other hand, in terms of its involvement situation with the company, its management owns Skin in the game, a fact proven in “Table 2” by the ownership of large capital contributions by very influential managers of the company, including its CEO, with 11.8% stake or Pierre-Paul Lassonde, a very prominent person in the investment community (CEO of Franco-Nevada), with 11.1%.

Porter’s Forces

Through this model, a holistic analysis of the current situation of Enghouse Systems will be carried out, with the objective of understanding the strategies and competitive advantages that could arise in the company.

Competitiveness

Enghouse is at first glance in an unfavorable situation, as there are a large number of competitors within the different vertical markets in which it operates.

However, the market is highly fragmented, with a very high level of demand for products and services.

Furthermore, the sector is in constant evolution, continuously generating new opportunities to enter very specific markets, which translates into a very beneficial situation for Enghouse, as it allows it to lead different market niches.

For the competition, the cost of entry is a very high outlay, as it does not compensate them to share profits in such a small market segment.

Therefore, if Enghouse is able to continue with its line of growth, it will be able to maintain its competitive advantage as a company already established in the sector, generating recurring revenues and scaling up persistently over time.

Bargaining power of customers and competitive advantages gained

Enghouse has a large number of customers located internationally. In addition, thanks to the company’s solid growth, it is expected that in the coming years the company will be able to increase its client portfolio, which will have a positive impact on the company’s revenues, as we will see in the projections shown.

The company’s clients tend to be located in different vertical markets, which are highly fragmented, causing a growing demand for clients seeking to meet their needs, generally low-capitalization companies.

For this reason, Enghouse provides the acquired companies with the possibility of obtaining professional tools to satisfy in the most optimal way possible, the needs demanded by their clients, in addition to brand images and financial support, generating a mutually beneficial relationship between both parties.

Once these companies start using the services provided by Enghouse, it is very difficult for them to change supplier, as it would generate a high switching cost for these companies.

Enghouse’s bargaining power is therefore very attractive, as it generates total dependence on its customers.

At the same time, the company has pricing power, since it could increase the quota of its customers, who, being in such a situation of dependence, would be forced in most cases to accept such a quota increase, being able to pass on the inflationary costs to the final consumer, constituting a clear competitive advantage.

Enghouse presents a great scalability in its business model, since the entry of new users does not represent any additional cost to the company once the software has been created, so that, if there are other interested customers, they would simply have to provide it to them without making any other investment.

On the other hand, Enghouse offers a strong network effect, as the use of products and services provided by the company increases the value of the company as more people use its services through the growth in compatible software.

Threat of new competitors and substitute products/services

As mentioned above, there are a large number of competitors in the market in which the company operates. However, the fragmentation shown in the sector minimizes this threat as it is costly for its competitors to enter niche markets already served.

Therefore, the risk of new competitors is minimized, since the savings generated by the companies would have to be very significant for the company to be able to cover the costs incurred during the learning process of the new software implemented.

Positioning ourselves in the worst case scenario, in the event of a possible entry of these competitors in the niches in which Enghouse operates, it should be noted that Enghouse’s strategy is focused on acquisitions.

Final valuation

After trying to clarify which characteristics have had the greatest impact on the company’s strategy, a numerical evaluation has been made of these variables, establishing a value of 0 or 1, depending on whether these variables are strategies in favor or against the company’s viability.

For its study, the variables related to the capital structure presented by the company have been considered with greater importance, being the pillar that supports all strategy, followed by characteristics in the products and services offered by Enghouse, and the direction of its management.

With all this, a rating of 9.12/10 has been obtained, showing an investment opportunity to be taken into account for the company and its organizational model.

For further details, see the “Qualitative” section in the “ANNEXES” file regarding the characteristics evaluated and their rating.

This qualification has been obtained by providing Enghouse with qualities that any company would like to exhibit, presenting clear competitive advantages, with a scalable model, long-term profit generation power, good capital allocation, pricing power, high replacement costs, etc., generating superiority over its competitors.

As for the risks associated with the company, we can see how in the “Risks” section of this essay, the company offers catalysts in practically all the exposures present, managing to minimize a possible negative impact on its margins.

SECTOR ANALYSIS

Enghouse Systems carries out its activities within the services sector, focusing on information technology or ICT, with a special focus on the Software and Computer Services subsector.

Despite having obtained only 5% of total revenues in Canada, the sector has been established within this market due to the greater impact of any variation in the company’s accounts. In addition, the study shows a possible upturn in the market, which could be a potential opportunity for the company.

Services Sector

As we can see in “Illustration 2”, the service sector has offered in recent years a very remarkable growth, with 68% in relation to the weight of the country’s economy and more than 79% of the population working for this sector.

Information technology and telecommunications subsector – TICs

According to “Innovation, Science and Economic Development in Canada”, the ICT subsector represents 5.1% of Canada’s GDP, with over 3.7% of the workforce across Canada.

According to the Toronto Stock Exchange – TSX, in recent years, the ICT subsector has grown at much higher rates compared to others, at 4% compared to 0.7% of the country’s total economy.

Even in a period of pandemic crisis, the ICT subsector continued its historical growth rate, with a GDP growth rate of 3.98%, while the Canadian economy’s growth rate was 5.1%, which is proof of its solid growth.

Of the more than 45,000 companies operating in the sector, 47.6% represent the Software and IT services area, followed by Communication services, with a 40.6% share of the total, corroborating the company’s good positioning as it is within two of the most influential areas of the TIC subsector.

Evolution and trend of Enghouse Systems’ most influential areas

Table 3″ is presented below, with variables related to the most influential areas of the ICT subsector as of 2020, focusing only on “Software and computer systems” and “Communications services”, following the economic activity offered by the company Enghouse Systems.

With regard to the area of software and computer services, we can confirm the very positive trend presented by this area, containing disciplines such as data processing, software development and communications, computer services… representing 2% of Canada’s total GDP.

Its sales revenues have been really favored, increasing at a rate of 9.4% in 2020, as well as the investment made in R&D (3.8%) and in growth with respect to the country’s GDP (5.5%), due to the growing demand for these services in the face of generalized confinements.

According to “Stats”, Internet access in Canada is still to be developed, as around 6% of the population does not have this social advantage, which translates into a possible expansion in terms of the sector’s room for improvement.

Another of the branches to be studied, as we have mentioned throughout this essay, is that of communication services, more specifically online communications or videoconferencing, presenting a very important margin for growth, as distance communication is of vital importance nowadays.

Revenues have also been very positive, with a growth rate of 2.6%, an increase in R&D of 0.6% and a development in relation to the country’s GDP of 3.4%.

Thanks to the boom in teleworking and the pandemic situation generated during the year 2020, web conferences and their use on the different platforms have grown at rates of 500% and 265% respectively, so that, even if the levels normalize, the trend is clear.

The estimates contained in the graph are really good, showing the potential growth that the subsector could harbor in the coming years.

The good growth estimated and presented by both subsectors, together with the high barriers to entry that exist in these markets (due to the high degree of specialization, long lead times, high switching costs and high customer dependency rates) make this a sector to be taken into account for holding in the portfolio.

If Enghouse can achieve greater brand power, high profits and an expansion of its market share, the company could present itself as an ideal candidate to be valued in this sector.

Competitors

Enghouse’s business model is very difficult to imitate, as the company manages to position itself in different market niches with very specific demands, growing inorganically through acquisitions.

Therefore, although companies similar to Enghouse have been presented, there is no company that manages to position itself in the same niches and under the same characteristics as Enghouse, as it contains particularities that make it unique in its sector.

However, the following are the most influential ones.

Private equity funds.
The objective of any private equity fund is to obtain income through the sale of the acquired companies, improving efficiency in each management body, and making decisions to expand margins as quickly as possible.
Enghouse has an advantage over its competitors, as private equity funds are not vertical market specialists.

Enghouse also has a “buy & hold” philosophy, in order to be able to develop the companies by growing them within the group, offering greater security to the companies and benefits both financially and in terms of stability and freedom in their management.

The disadvantage of Enghouse with respect to this type of entities is in the acquisition price offered, as they only offer acquisitions below the intrinsic value of the company, with the private equity funds offering higher amounts.

Constellation Software.
Constellation Software is a Canadian company belonging to the services sector, whose objective is to provide support to its clients in the development, installation and customization of software within the different vertical markets.

It is the clearest competitor of Enghouse, since its business model is very similar, trying to make management more efficient in the acquired companies, expanding its cash flows to obtain recurring revenues. In addition, Constellation’s main objective is also growth through acquisitions.

However, the acquisitions it makes contain a higher acquisition cost, as its capitalization is much higher (43.71 billion versus Enghouse’s 2.4 billion), and there is no competition between the two companies because of the little that would be involved for Constellation to make an acquisition at the figures set by Enghouse.

A differentiating factor between the two companies comes from their organizational model, where Enghouse has a centralized model, aimed at integrating and optimizing the acquired companies, while Constellation has a decentralized model, empowering the management team of the acquired company.

On a quantitative level, Constellation has much lower liquidity ratios, while Enghouse has greater investment facilities in the event of a potential market opportunity.
In terms of debt ratios, Enghouse also comes out on top, since by not using financial debt, it manages to obtain ratios well below those of Constellation.

However, in terms of margins, Enghouse only manages to win in terms of net margin and EBITDA, with Constellation offering a slightly higher figure, at 0.35X compared to Enghouse’s 0.23X.

In terms of profitability ratios, Enghouse only has a superior ROA ratio, and is far superior in terms of ROE and ROIC.

It is considered Enghouse’s most direct competitor, and could pose an obstacle in the future once it manages to obtain a higher level of capitalization. However, assessing its current situation, it does not present any risk, since the difference in size and investments between the two companies is quite remarkable.

Salesforce.
Salesforce offers solutions related to customer relationship management through software in the cloud, reducing storage equipment costs.

The company has experienced a very solid growth due to the growth of cloud servers, operating through a “CRM” platform in which they carry out all the management of their departments.

Salesforce could qualify as a direct competitor of Enghouse, dealing with specific software in terms of customer management. However, Enghouse offers solutions in a broader set of markets and can continue with its core business even if Salesforce’s market share increases significantly.

In terms of the ratios offered by both companies, Salesforce should not be a problem for Enghouse, as the only metric in which it is lower is FCF margin.

Five 9.
Five9 is a company that provides software in the cloud for call centers, with the aim of supporting organizations to digitally transform and move from a software with local installations, to another in the cloud.

To this end, the company provides a virtual platform with a multitude of functions, such as customer service, marketing, advertising, etc., related to contact centers for different sectors, from financial services to others such as healthcare and technology.
The company has been acquired by Zoom, an important event as it is within the online communications subsector where Enghouse is located.

However, in terms of the quantitative level offered by the company, Enghouse is the clear winner, as it manages to win in all the metrics analyzed with the exception of the level of liquidity presented by the company.

Genesys.
The company Genesys is defined as a global leader in customer experience in the cloud, providing cutting-edge technology in call centers for all types of medium-sized companies as well as large corporations.

The company has been able to grow at high rates thanks to its acquisitions, so in this sense, it has a similar inorganic growth model to Enghouse.

However, once again, Enghouse manages to cover a broader set of markets, beating Genesys at any level analyzed in its ratios.

Open Text Corporation.
Open Text is Canada’s largest software company, which develops and sells enterprise information management software, enabling interaction with SAP.

Despite its large presence in the domestic market, it can only be compared to Enghouse in terms of competition in information management software, so an increase in its market share would have little significant impact on our company.

The company is only positioned above Enghouse in FCF growth, so, at first glance, it does not reach the level of profitability offered by Enghouse.

Oracle.
Oracle is one of the best known companies worldwide, developing large databases through related information, consolidating its position as a leader in business software, and connecting all levels of technology under the same platform.

This is a very recurring business, whose company has great pricing power when dealing with such a customized type of software.

Again, as in the case of Open Text, the company becomes a competitor of Enghouse only in terms of information management software, so it does not end up being a direct competitor of the company either.

With respect to its ratios, “Oracle” offers liquidity ratios above the levels obtained by Enghouse, as well as in EBITDA margin and FCF.

However, the level of leverage used by the company is much higher than the sector average, obtaining negative profitability margins, which means that our estimates at the ratio level still do not evaluate this company above Enghouse.

Final valuation

Having clarified the main characteristics of the sector, we can observe a potential revaluation of the company within the market, obtaining an analysis by weighting values of 0 or 1 in relation to the variables presented.

This revaluation is justified by the growth in the different areas in which the company operates, both in terms of services and software and IT services, with Enghouse in an ideal position in the search for synergies and growth in profits.

For all these reasons, the sector has obtained a rating of 9.28/10, showing its potential to become one of the sectors to be taken into account in the portfolio, offering Enghouse the possibility of positioning itself as one of the benchmark companies.

See the “Sector” section in the “ANNEXES” file for details of the characteristics evaluated along with their rating.

Macroeconomic analysis

PESTEL Analysis

Macroeconomic analysis is a fundamental aspect in any type of valuation analysis, even more so now with the fiscal policies adopted by the different governments and Central Banks to alleviate the effects generated by the pandemic.

Therefore, we will carry out a study based on the PESTEL model, offering a global perspective on the main macroeconomic factors produced in Canada.

It should be emphasized that only those data that are most relevant to Enghouse Systems and may have a significant impact on its accounts will be collected.

Political factors

To date, we have seen how central banks and governments have helped to mitigate the effects of the pandemic through expansionary measures aimed at reactivating the economy and minimizing possible future risks.

Nevertheless, the FED announced the implementation of restrictive measures in view of the increase in inflation levels, which we will analyze below.

In terms of regulations, Canada’s government is rated very positively, favoring free trade and with very reduced protectionist measures in favor of its national economy.

In addition, Canada is considered one of the best countries to start a business due to the ease of document management in business creation, ranked 22nd out of 190 countries according to the Doing Business Ranking, and 14th out of 141 countries in the competitiveness index as of 2019.

Canada is a member of the World Trade Organization, which influences all commercial activity, minimizing its exposure to risk.

On the other hand, Canada has a judicial body that is completely independent from the rest of the representative bodies, which is valued very positively as it is isolated from any potential politicization oriented towards a specific ideology.

According to the “Canadian Public Sector Corruption Perceptions Index”, its governments are well rated, below the average of other developed countries.

Economic factors

With respect to the Canadian GDP, we can observe how it has experienced a truly spectacular development over the last few years, with projections in line with its history, offering a very interesting opportunity for future growth.

As of November 2021, the CPI rate in Canada was 4.7%, an inflationary level to be taken into account in the coming years.

As a catalyst for this event, Enghouse has pricing power and can pass these costs directly to the consumer. However, this measure could have a negative impact on the customer portfolio presented by the company.

This trend can be explained by the economic growth experienced in recent years, benefiting the companies operating in this country, as they have lower interest rates to finance themselves and generate greater investment capacity.

As for the savings rate, it has been reduced thanks to the reactivation of consumption, benefiting Enghouse by obtaining greater income with the increase generated by the sale of its services, justifying the unusual increase in sales as of 2020.

Analyzing the country risk premium, “Illustration 6” shows a historical downward trend in Canada’s risk premium (as measured by the U.S. bond), currently at 1,537 points as of October 1, 2021.

In relation to the Gini Index[1], it is worth noting the decreasing trend in the country, benefiting the companies as there is not such a marked difference in capital in society, giving Enghouse greater opportunities to attract customers.

However, at a global level, the meter shows how the trend is intensifying, which could become a risk for Enghouse due to a potential reduction in its sales.

Another negative aspect to take into account is the level of debt in which the country is immersed (See “Illustration 7”), obtaining a public debt of 1,693,000 million euros as of December 2020, with a debt rate as a percentage of GDP of 117.46% and a debt per capita of around 44,549 euros, considered one of the highest in the world, offering a very significant exposure to risk in the long term.

However, thanks to the level of quality of life in Canada (global leader according to the “Best Countries of 2021” report), its high rate of economic and social growth, and its average salary (37,446€ per year), a decrease in the trend of this variable is expected.

As for the level of taxes in Canada, we can see in “Illustration 8” how it is above the average of the OECD countries in relation to the GDP generated in 2020.

Therefore, despite not having a very high tax policy, Canada will have less attraction power compared to other countries with lower tax rates, which could reduce the level of investment in the country.

Technological factors

Canada still offers room for improvement in terms of broadband expansion across the country, so, despite having a stable connection network, Enghouse will be able to take advantage of this situation by capturing new opportunities in the face of a growing demand among the population.

In addition, 5G is settling in the most developed cities in Canada, thanks to its three major telecommunications companies (in addition to many others), with the aim of obtaining an improvement in connection speed, and obtaining a massive ecosystem of the internet of things (balancing latency and production cost), again providing a growing trend in terms of connectivity.

Social factors
There is a high level of activism in Canada in favor of climate change measures, so even if Enghouse does not have a negative impact on the environment, it should try to establish sustainability measures in its process of creating value for the consumer.

In addition, as we can see in “Illustration 13”, the demographic trend is positive, approaching 40 million inhabitants due to the increase in the number of immigrants.

Risks

Pandemic risk

During 2020, there was a slowdown in consumption by the population, linked to a reduction in business activity caused by the COVID variant.

The measures implemented by governments and Central Banks due to the current “Omicron” variant could have a direct impact on Enghouse’s interests, so it is worth analyzing this variable for what could happen.

Although the volume of infections has increased in recent days, affected countries such as South Africa (origin of the last variant) or Germany, have already gone through a process of stabilization of infections as of January 10, 2021, showing a decrease of infections in the new variant.

Many scientists confirm that herd immunity is arriving, as well as the weakening of the microorganism, alluding to the final stage of any pathogenic agent with respect to the increase in its contagious capacity, leaving lethality in the background, since the virus would disappear along with the infected individual.

We can compare this fact with the current situation, after a drop in lethality and such a sharp increase in contagion, by alluding to the comparison with the Spanish flu of 1918, which ended two years later after going through three very marked upturns in its evolutionary cycle (as well as the one presented by COVID-19 in developed countries).

Therefore, although the end of the pandemic is uncertain, we can observe the progressive weakening of the pathogen, reducing the possibility of applying restrictive measures in the coming years, and thus mitigating risks due to external variables that could have an impact on the benefits of Enghouse.

Risk of acquisitions

Acquisitions are characterized as Enghouse’s main development driver, supported by its history and the professionalism of its management, so it is not expected to be a danger to the company’s expected growth performance.

The only risk we might encounter is the current overvaluation of the market, mainly due to low interest rates, very influential liquidity injections, and an increased awareness of the stock market among millennials.

Illustration 10″ presents the Buffett indicator[1], which shows the ratio between the US stock market and its GDP, which as of January 20, 2020, is 57% above the historical average, indicating an overvaluation in the market.

Due to this overvaluation, it is more costly for Enghouse to continue to develop its inorganic growth (reflected in “Acquisitions, net of cash acquired” within cash flows), as there are fewer acquisition opportunities at reasonable multiples.

Therefore, the company could generate liquidity risk by holding more capital in cash than it actually needs.

However, market overvaluation tends to normalize, and this is where Enghouse’s management can play a key role.

Interest Rate Risk

The FED has publicly announced its intention to raise interest rates in a prolonged manner for the next few years, with three strong rate hikes in 2022 to the level of 0.9%, another two rate hikes after reaching 1.6% for 2023, and two last hikes for the end of 2024, obtaining a final interest rate of 2.1%.

It should be noted that the yield on the US 10-year bond is currently 1.5%, well below the level announced in the 2.1% rate hike, so there may be some correction in the coming years.

However, even if the FED ends up making some variation in the measures implemented, the idea of raising rates is strong due to the inflationary level in which we find ourselves, generating difficulties for companies by presenting a higher cost of financing.

However, Enghouse has two catalysts, the first being the non-use of debt, so this measure should have little impact on the company’s fundamentals.

On the other hand, with regard to inflation levels, as already mentioned in this essay, Enghouse has pricing power and can pass on the costs generated by this excess inflation to the customer.

Technological risk

The technological risk produced by a possible obsolescence in the software managed by Enghouse is another of the possible risks to be assumed.

There is a high number of positive estimates in relation to the software and online communications subsectors. However, we must consider the possibility that this may not occur in the short term, due to a punctual reduction in the demand for such services, and consequently, generating large losses for the disbursement made in both areas.

However, the future growth presented in both technologies is unbeatable, making a generalized long-term decline in both services very unlikely.

Furthermore, due to the company’s zero use of debt, they could use this debt to contemplate acquisitions in other areas in which they are already focused, having only to redirect the strategy implemented by the company.

Riesgo de cambio

Enghouse’s revenues come mostly from abroad, with only 5% of its turnover coming from Canada.

This fact could be considered positive, as the company is diversified in terms of potential foreign exchange risk, minimizing depreciation risks.

Furthermore, in the event of such an event, the company has its own department specialized in foreign currency trading and exchange insurance, minimizing the possible impact of exceptional variations, despite the fact that the Canadian dollar is a stable currency (analyzed in this study).

Final valuation

Analyzing the evolution shown in the different macroeconomic sections, we can confirm the absence of a situation of opportunity to invest without external risk, as there are possible alterations mainly due to high inflationary levels, implementation of restrictive policies and high levels of debt in the country.

However, there are a greater number of positive variables to take into account, among them the good record of economic growth presented, efficient management with respect to international trade, low risk premium, stability in the national currency, etc.

For the correct analysis established, the importance of economic variables has been taken into account to a greater extent, being the ones that have generated the greatest negative repercussions within the study, followed by political and technological variables. See the “Macroeconomics” section in the “ANNEXES” file for more details on the characteristics evaluated.

Nevertheless, the final score obtained for the current macroeconomic situation was rated at 7.5/10, as positive variables could accelerate the pace of growth and positively boost the overall economy.

DAFO

Weaknesses

Negative aspects manifested within the company’s organizational model, hindering or potentially hindering the proposed objectives. We highlight the following:

• Sales level. Slowdown in sales volume after the sporadic increase generated in 2020. However, a positive trend in these levels is expected from 2022 onwards thanks to the tailwinds generated by the pandemic.
• National expansion. Although the geographic diversification shown by the company is remarkable, Enghouse could be missing a good opportunity in its own market, whose forecasts in the ICT sector are extremely advantageous.

Threats

Threats are variables which Enghouse does not have the power to decide, and may limit the development of the organization, and may include the following:

• Regulations. Regulations in the service sector tend to be constantly altered in order to improve the interests of consumers, negatively affecting the company’s interests.
• Geopolitical events. Exposure to macroeconomic events (Russia-Ukraine conflict, inflation level, government elections, etc.) which should be monitored in order to minimize any impact on the company’s accounts.
• Trade relations. The current growing tension between the United States and China makes any event of vital importance for Enghouse’s interests, as the US is the main demander of the company’s services.

Strengths

Strengths are characterized as positive qualities, which Enghouse can control, building a solid business strategy going forward. We can highlight:

• Physical resources. Enghouse is characterized as a company with a very broad portfolio of products and services, allowing the company to focus on various market segments. Being an asset-light company[1], with a large amount of intangible assets, it does not require a high use of capital, facilitating the generation of productivity gains, cost reductions and increased sales.
• Financial resources. Enghouse’s recurring revenues enable the company to increase its profitability through new acquisitions, with annualized cash generation growth of 20.09%. In addition, it has an annualized net margin yield of 21.06%, demonstrating its solid financial position.
• Competitive advantages of the company. Business scalability, advantage in advance financing (subscription service), high exchange costs, network effects, high replacement cost, high ROIC margins, pricing power, light on assets, large amount of intangible assets and good management of the board.

Opportunities

Opportunities involve situations which could benefit the company’s interests, among which we highlight:

• National expansion. As mentioned above, Enghouse has little market share in its home country, a situation that it may be missing out on due to the high growth opportunities offered by its software sector.
• Entry costs. Digital marketing is currently a significant reduction of entry costs to new markets for companies, managing to expand in any process of digitization, marked by a global society as connected as the current one. Enghouse does not currently have any investment in this area, which is both a mistake and an opportunity to be taken into account.
• Investment in R&D. Although Enghouse has an annualized growth of 11.54%, the boom in the sector forces the company to continue increasing this item, trying to position itself as a leader in different market segments, expanding profit margins and increasing its brand value.

Quantitative analysis

The estimates included in this test have been made based on the historical growth of each individual item contained in the annual accounts of Enghouse Systems Inc. as of December 31, 2021.

For the calculation of these estimates, the period from 2016 to 2021 has been analyzed, betting on a stability in its growth due to the various variables observed in the qualitative analysis of this test.

It is assumed that the company’s business model will not be adversely affected by external alterations not contemplated in this report, following the historical trend marked by the company and variations justified by facts argued in the qualitative section of this essay (at an organizational, sectorial and macroeconomic level) or in the company’s own accounts.

In order to generate a more realistic result on the evolution of the items, graphs have been projected without taking into account the year 2020, due to the unusual growth presented thanks to the benefits generated in the pandemic, trying to project an estimate minimizing biases through an average between a simple linear trend line (to try to estimate its trend), and polynomial (weighting the fluctuations generated).

In this way, a final projection table will be obtained in each section, with the estimates carried out in the analysis, where a green symbol will denote an estimate in accordance with the trend line, and a green symbol will denote an estimate in accordance with the trend line.

Revenues

As of 2021, the company experienced a decrease in sales with respect to the previous year of -7.3%, justified by the extraordinary increase in the demand for software services generated after the pandemic of 2020 (growth of 30.6%).

Through “Illustration 11”, we can observe how the company’s revenues follow a stable growth line, presenting an annualized growth of 8.69% in the period between 2016 and 2021.

The item that has had the greatest importance in this growth has been “Hosting and maintenance services revenue”, in line with the importance stipulated by the company.

Said item is composed of revenues related to technical support or assistance services (after-sales revenues), obtaining a 12.86% annualized return in the period between 2016 and 2021, with an unusual upturn in 2020 due to the benefits obtained following the habits generated after the pandemic.

As for the item “Revenue from professional services”, we can observe a weak growth of 4.24%, including services associated with the installation, implementation and configuration of services, occurring in conjunction with software licenses, whereby, the item “Revenue from software licensing” obtained a similar performance of 2.38%.

Hardware revenues” was the item that experienced the greatest development, with an annualized growth of 22.28%, due to a growing demand for technological components as a result of the boom in the sector…

Estimated projections

Due to the preservation of growth shown in the different Enghouse revenue items, and the increase in the representation of the “Hosting and maintenance services revenue” item over total sales (being the most significant item in terms of revenue), an annualized revenue growth of 9.91% has been obtained, a more than feasible performance after taking into account a normalization of sales occurring in 2020 and the expected growth in the demand for software services.

Balance

Assets

Enghouse achieved an annualized historical return on assets of 9.98%, driven by “cash” items (20.09%), followed by goodwill (9.06%).

This goodwill is directly related to the two operating groups owned by the company analyzed in the qualitative section (IMG and AMG), obtaining at 2021 a weight with respect to total assets of 33.1%, a very relevant figure caused by the improvement in the efficiency of the acquired companies and the synergies generated in the sector, reflecting intangible competitive advantages obtained by the company.

The item “Intangible assets” has a weight with respect to total assets of 15%, although its growth is not so significant (3.28%), with “Acquired software” (55.78% of the total) and “Customer relations” (with 44%) contributing the most value to the company, reflecting the trends that Enghouse is committed to.

Liabilities

As for the company’s liabilities, we can observe the trend shown in “Illustration 13”, where Enghouse has obtained an annualized growth of 7.9% in recent years, lower than that of assets, and highlighting the efficiency of the company’s management.

Among the items that have increased the total liabilities figure throughout the company’s history have been “Accounts payable and accrued liabilities” and “Deferred income”, the latter being obligations on the part of the company due to the subscription service offered by the company, obtaining income in advance.

This fact is of vital importance, since in spite of being accounted for as a liability, it is really a future asset in the form of “Net accounts receivable”, which may blur the results of our valuations, which will be established later on.

Equity

Illustration 14″ shows the upward trend obtained in the development of the company’s net equity, obtaining an annualized growth of 11.09%, mainly caused by the item “Retained earnings”, which has a total equity percentage of 78.1%, showing the company’s liquidity to undertake potential acquisitions and confirming the growth strategy proposed by the board of directors.

As for the development obtained in the individual equity items, “Retained earnings” (13.6% annualized) and “Contributed surplus” (13.83% annualized) show the greatest potential, the latter being surpluses obtained by issuing shares above their par value, share repurchases or other compensations, which is a good sign of the value of the company’s shares.

Estimated projections

An estimated growth in assets of 11.27% is expected, a projection in line with the historical growth established in its items, and 13.10% for net equity.

The projected growth in equity is explained by a higher weighting of the item “Retained earnings”, estimating a higher annualized growth of 14.31% compared to the historical 13.6%, and a weighting for the year 2025 with respect to total equity of 81.5% compared to the 78.1% established in 2021.

This is justified by a potential stabilization in market prices and the rise in interest rates set by the Fed, which could lead Enghouse to increase this item in order to have more liquidity and carry out a greater number of acquisitions.

With regard to assets, the increase derives from an increase in the items “Intangible assets” (from 3.28% annualized to 4.50%) and “Goodwill” (from 9.06% to 12.57%), justified by an increase in computer programs due to the growth of the sector, and the competitive advantages in the form of intangibles that the company is expected to obtain.

The liabilities item is expected to decrease slightly with respect to its historical level, with a growth of 7.18% due to the normalization of the company’s debt levels.

The company has obtained a historical growth in total debt of 44.60%. However, Enghouse has no financial debt, offering negative figures and is in a net cash position, i.e. showing great financial strength.

The estimates have been made to justify the strategy of the management, because if Enghouse has not used the low interest rate situation to finance itself, after the increase issued, we do not estimate a change in its strategy, contemplating a growth of 21.05% for future years (thus widening its negative debt margin).

Profit and loss statement

By virtue of the 2X Split contemplated in the “Balance Sheet” section within the “ANNEXES” file, as of December 21, 2018, clarify that the data offered in the annual accounts of Enghouse Systems, have been modified by performing another “Split” (fictitious) prior to said period, with the objective of not distorting the results obtained in Enghouse’s profit margins..

Costs

The company’s direct costs (“COGS”) have represented an annualized expense of 6%, with the hardware item (18.41%) experiencing the greatest growth, and the “Services” item having the greatest weight with respect to the total, evidenced by the fundamental role of the developers in the search for optimization in the technology used. As a result, the company has achieved an annualized growth of 9.84% in gross profit.

With respect to operating expenses, Enghouse has obtained an annualized expense of 7.41%, boosted by the “R&D” items (11.54%), and the weight in “Sales, general and administrative expenses”, thus obtaining an annualized growth in total expenses of 6.88%, showing a very marked decrease in the last year of -8.2%.

Most important financial indicators

Through “Illustration 15”, we can observe the positive development of EBITDA presented by the company, with an annualized growth of 14.44%, normalizing the increase generated in 2020 with respect to the previous year of 53.3%.

On the other hand, with respect to the net margin offered by Enghouse, we can observe the positive trend of the item through “Illustration 16”, obtaining an annualized growth of 14.44%, a figure equal to the development in its EBITDA (casual event).

In order to obtain the earnings per share presented by the company, it is necessary to take into account the number of shares issued by the company, which shows a development of 0.42% annualized, having a positive impact on the shareholder, as there is no loss of value caused in the form of capital increases.

This small increase in the issuance of common shares slightly reduces the development of earnings per share with respect to the net margin, with an annualized growth of 13.96%.

Estimated projections

As can be seen in “Table 6”, the growth estimated in our projections follows the historical growth line generated so far, with a reduction in expenses, and consequently, an increase in the company’s net margin.

According to the table of estimates, the decrease in expenses is not very significant, and does not justify the large increase in the net margin item.

However, due to the optimization of costs in practically all items (with the exception of amortization expenses), it has been decided to follow this trend, as it is estimated that the change in business habits after the pandemic will reduce these levels.

“During the year, we focused on bringing costs in line with revenues, improving our gross profit margins and lowering overheads by reducing facilities, travel and personnel costs.

This, combined with higher margins associated with reduced acquisition integration requirements during the fiscal year, increased our EBITDA margins and net margin” (Stephen J. Sadler, press release 2021).

Thus, despite having maintained the percentage of direct costs in relation to total expenses, a reduction in the weight of operating expenses has been contemplated, from 48% as of 2021, to 43%, with “Sales, general and administrative expenses” being the item that has experienced the greatest decrease (and the greatest representation in terms of operating expenses), going from a rate of 25.9% to 22.4%.

After having considerably reduced the total expenses produced by the company, and the estimated sales growth justified by the growing demand for software services, we obtain a projected net margin development of 19.24% annualized..

Cash flows

Operating cash flows

The company has achieved an annualized growth in operating cash flow of 14.67%, with the largest growth items being “Financial and other expenses or income” (48.58%), “Income taxes paid” (22.22%), and “Stock-based compensation expense” (17.83%).

This growth conveys a very positive level of solvency, as its development denotes success in transactions related to Enghouse’s core business.

Investment cash flows

Regarding cash flow from investments, the item has obtained an annualized growth of 10.58%, largely due to the development within the subheading “Acquisitions, net of cash acquired”, with a growth of 20% and conceived as the item with the greatest weight in the group.

The result obtained follows the strategic line set by the company’s management, with a well-defined acquisitions policy.
The decrease in this item as of 2020 with respect to the previous year (-41%), can be explained by the few acquisition opportunities presented by the market due to their overvaluation, driving the investment cash flow to contract its realized investment.

“We continue to actively pursue acquisition opportunities in order to expand our portfolio. However, valuations for technology acquisitions remain elevated and many opportunities do not meet our acquisition, financial and operational criteria presented during the year.”

Looking ahead, however, we expect significant growth in this line item, as we will see in more detail in the cash flow estimates.

Financing cash flows

As for cash flow from financing, the figure is not very relevant, since, as we have already mentioned, the company does not use financial debt.

However, the company shows a growing trend in the distribution of dividends, with a normalized historical growth of 17.97%, “normalized” by the fact of not including the year 2021 in its development, since a special dividend of 1.5 dollars per share was issued, due to the few acquisition opportunities presented in the market.

As a result, the annualized growth of the company’s financing flows has grown at a normalized rate (excluding 2021) of 23.44%.

Cash generated

As a result, Enghouse has achieved an annualized return on cash generation of 20.09% over the last 5 years, resulting in a cash inflow of almost 196M as of 2021.

This fact, together with the non-use of financial debt and the almost 106 million generated in FCF, makes a total of 302 million liquid to undertake the following projects

Estimated projections

Regarding the projections for the coming years, we can see how the operating cash flows follow the line of growth marked by the company.

There is a very large increase with respect to investment cash flows, due to the increase in acquisition opportunities that the company is expected to generate in the coming years.

With regard to the historical growth shown in cash generation, it has been decided to include the year 2021, because in spite of presenting a very marked decrease due to a special dividend, if we were in a regular situation, this investment would have been allocated to acquisitions, balancing both variables.

With respect to the FCF generated by the company, through “Illustration 20”, we can observe the upward trend presented in its history, obtaining an annualized profitability of 15.27%.

On the other hand, in reference to the established projections, the FCF growth will be increased by 18.27% annualized, justified by the estimated growth in EBITDA by the company in view of an expected cost optimization process.

Ratios

Through the section “Ratios-Valuation Multiples” in the file “ANNEXES”, we can observe the evolution in the levels of ratios presented by the company, exposing its historical ratio and the growth rate presented in order to minimize biases and observe the future trend of the company.

Before analyzing the various ratios obtained in the company’s annual accounts, it should be noted that Enghouse has a subscription model, obtaining in the item “Deferred income” within liabilities, capital derived from the sale of its services.

As it is considered as anticipated income (since Enghouse offers its services once the payment has been made), it is recorded under liabilities, to be later transferred to current assets once the services have been rendered (“Net accounts receivable”).

Therefore, it is worth highlighting the company’s flawless management, since despite being able to obtain distorted ratios as it contains hidden assets, the company shows solidity in its metrics, amending the disadvantageous situation in which it finds itself for its analysis.

Liquidity ratios

The company has a positive working capital, with an annualized growth of 21.68%, exhibiting good management of its resources, despite having “Deferred income” as a liability item, which has a negative impact on the metrics analyzed.

The company’s liquidity ratio is very positive, growing at a rate of 4.4% and justified by a historical ratio of 1.72X, within the optimal range for the sector (between 1.5X and 1.75X). The historical ratio for the sector stands at 2.02X, without being more profitable due to the possibility of presenting idle resources.

With respect to the acid test metric obtained by the company, Enghouse again manages to generate a very positive ratio, with a historical ratio of 1.64X above the recommended 1X.

This result indicates that the company has no problems in meeting its short-term obligations. Once again, the historical ratio presented by its competitors is higher (1.86X), which means that it may have idle resources.

As for the immediate cash ratio presented, it is far from the optimal value of 0.3X, with a historical ratio of 1.07X, increased by a lack of investment opportunities in recent years.

The collateral ratio offers high creditworthiness to Enghuse’s creditors, with an annualized growth of 1.9% and a historical ratio of 3.04X, well above the industry recommended minimum of 1X.

The financial autonomy ratio also presents a very positive result, placing the company at an average of 2.04X, a value well above the optimal value of 0.3X for the sector, demonstrating its great independence when choosing sources of financing.

The liquidity ratios analyzed are in an ideal situation to protect against the increase in rates established by the FED, and the importance of continuing with its acquisition strategy, realizing any purchase opportunity that may arise.

Debt ratios

The Net Debt / EBITDA ratio offers a negative historical ratio of -1.29X compared to 2.65X for the sector, justified by the fact that the company does not use financial debt in its business activity.

In terms of the debt ratio, the company again outperforms the sector, offering a historical debt ratio of 0.03X versus 1.02X for the sector.

The growth of this ratio stands at 30.2% annualized, however, it has been caused by the increase in debt generated after the pandemic, with projections that tend to normalize this level.

The leverage ratio is outstanding, with a historical multiple of 0.33X versus 0.76X for the sector, decreasing at a rate of -1.9, justifying the downward trend estimated in our projections, minimizing risks by using the least amount of debt possible.

The company has a clear competitive advantage over its competitors, as Enghouse manages to obtain higher levels of profitability and margins with respect to its competitors (using debt), in a situation of low interest rates, generating a difficult situation for the sector with the rise in interest rates, which is natural for Enghouse.

Profitability ratios

In relation to ROE, the company again has a historical ROE above the sector, with an annualized growth of -% and a historical ROE of 0.18X, while the sector’s return is negative, at -0.16X.

Analyzing the company’s ROA, we can see how its profitability is much higher than that of the sector, growing at a rate of 4.1% and standing at a historical multiple of 0.12X, compared to the 0.04X of its competitors, showing the efficiency in the management of its assets.

Relating both metrics we can confirm the company’s positive operating leverage (ROE > ROA), giving the company the possibility of generating a higher level of debt to obtain higher returns.

The ROIC ratio generated by the company has truly spectacular levels, with a historical 0.3X compared to 0.11X for the sector, growing at a rate of 4.3% and confirming the company’s clear competitive advantage over its competitors.

As for the company’s ROS, Enghouse offers a profit per unit of sales of 0.21X, a multiple above the sector’s optimal level (located at 0.15X), confirming the competitiveness offered by Enghouse in the market in which it operates.

This excellent profitability manifested in its ratios can also be interpreted through the development in the “CAPEX growth” item, with a normalized growth of 14.47%, which, together with the growth contemplated in the “R&D” item (11.54%), offers a very relevant potential for the company.

Ratios measured in margins

In relation to the sales generated by the company, Enghouse offers a 5.3% annualized growth in margins, with a historical net margin of 0.18X versus the industry average of 0.03X, exhibiting strong cost efficiency.

The company’s EBITDA margin is in the same situation, with an annualized growth of 5.3% and a historical ratio of 0.31X versus the 0.18X of the sector, providing a great possibility for growth in the organization.

The FCF margin presented by the company is slightly below the sector’s historical ratio (0.19X versus 0.2X). However, this margin is above the average as of 2021, with a historical rate of 6.1% compared to the -7.6% obtained by its competitors, presenting ample room for improvement in the coming years.

Estimated projections

We can see that in general terms, the company has a very good historical financial health rating of 9.06/10, the negative aspects being its average FCF margin (although the item tends to grow), and its above-optimal ratio in immediate cash (justified by the few current investment opportunities).

In relation to the year 2021, Enghouse presented a substantial improvement in FCF margin due to the detailed historical growth, standing at 0.23 as of 2021, pushing the company’s rating to an increase of 9.69/10, in the absence of a reduction in its immediate cash margin.

With regard to the estimates obtained after analyzing the company, a significant increase has been projected in practically all the ratios analyzed, due to the growth that the company is expected to obtain in the coming years.

However, there has been a decrease in the working capital generated by the company (although still very positive), justified by an increase in the development of the item “Deferred income” (current liabilities), compared to the growth of its current assets.

This fact tends to depreciate the result obtained by Enghouse, being future profits that will become part of the company’s current assets. This has resulted in an insignificant reduction.

Valuation methods – Enghouse

Valuation Multiples

The multiples valuation model attempts to establish a value that can signal signs of overvaluation or undervaluation in the price of a share at present value.

However, the purpose of this thesis is also to project these multiples into the future, arriving at a target price for Enghouse together with its rate of return over the next few years.

PER

The company’s historical P/E stands at a value of 32.1X, showing a multiple as of December 2021 of 31.63X, well below the sector’s historical value of 65.3X and 78.82X as of 2021, showing an undervaluation in the company’s price.

EV / FCF

As for the EV/FCF multiple, we can see how the company is at a value well below that of the sector, with a historical value of 27.59X compared to the sector’s 49.77X.

Furthermore, as of December 2021, its multiple is below the historical multiple presented at 25.9X, again, well below the values presented by its competitors, again showing an undervaluation in the company’s price.

EV / EBITDA

In relation to the EV/EBITDA multiple presented by the company, Enghouse is once again undervalued compared to its sector average, offering a historical multiple of 16.91X, and 16.48X as of December 2021, which is well below the level offered by its competitors of 40.51X.

EV / Ventas

With respect to the company’s EV/Sales margin, Enghouse is once again undervalued with respect to its competitors, since analyzing either the company’s historical multiple (5.28X), or the multiple offered as of 2021 (5.91X), both are below that of its competitors, at 7.13X.

Estimated projections

For the calculation of the estimated profitability offered by the “Quick Valuation” method, we will consider the growth of the item based on the history presented in this variable.

With respect to the profitability obtained through the economic model formulated, we will obtain estimates in accordance with the variations justified in this test, managing to generate a more biased estimate of the estimated profitability of Enghouse, since if the entire sector is in overvaluation zones (as we have commented throughout the test), the use of this methodology will be of little use.

With respect to the P/E multiple, projecting the future EPS contemplated by the historical growth in its 13.96% heading, we obtain a target price as of 2025 of $90.91, generating an annualized yield of 14.38%.

On the other hand, based on the normalized growth of the items justified in this test, we obtain a growth in EPS of 18.75%, generating a target price as of 2025 of $106.81, giving an annualized return of 19.18%.

As for the EV/FCF multiple performed through the rapid valuation method, we have obtained a historical growth in FCF of 15.27%, which, together with the growth in financial debt (16.19%) and the growth in the number of shares outstanding (0.42%), projects a target price for the year 2025 of $97.73, achieving an annualized return of 16.56%.

Based again on the projected economic model, we obtain a development in the FCF item of 18.27% annualized, a growth in financial debt of 21.05% and a growth in the number of shares outstanding in line with its history (0.42%), achieving a target price of $108.68 for the year 2025, with an annualized return of 19.70%.

Estimating the future value of the company by rapid valuation on the EV/EBITDA multiple, we obtain a historical EBITDA of 14.44%, together with the development obtained in financial debt and number of shares outstanding, we achieve a target price for the year 2025 of $91.83, with an annualized return of 14.76%.

Considering the economic model generated, we have estimated a historical growth in EBITDA of 14.60%, together with the development in financial debt and number of shares outstanding detailed, we obtain a target price for the company for the year 2025 of $93.30, generating an annualized return of 15.22%.

Finally, estimating the company’s target price using the EV/SALES multiple, we have obtained a historical growth in sales of 8.69%, together with the development in financial debt and number of shares outstanding already stipulated, we have managed to generate a target price for 2025 of $66.69, achieving an annualized return of 5.94%.

Based again on the economic model presented, we have obtained a growth in sales of 9.79%, together with the development obtained in financial debt and number of shares outstanding, we have obtained a target price for the year 2025 of $70.20, generating an annualized return of 7.31%.

Through the estimates presented in “Table 11” and “Illustration 27”, we can observe the great revaluation potential presented by the company.

The projections made in this test offer a value above the historical value presented by the company, due to the variables already analyzed, making the Enghouse company a very good buying opportunity in practically all multiples except for EV/SALES, which does not represent a profitability as the historical market growth is around 10% in the last 100 years.

Discounted cash flows

The discounted cash flow method is a valuation technique used to evaluate present values of expected cash flows at a discount rate or “WACC”.

For its estimation in this test, since Enghouse does not have financial debt, a cost of debt of 5.91% (EV/SALES multiple at which the company is listed) has been assumed, together with the cost of capital presented by the company of 8.5%, giving a cost of capital of 7.5%.

This result in cost of capital is given by variables such as the beta presented by the company (5.81, estimated for 5 years), assuming the Canadian risk-free rate (1.92%), and an expected market return (10%, historical market average).

Finally, these estimated values for the company’s costs have been multiplied by the percentage of the capital structure that is equity (64%) and debt (36%), obtained from the balance sheet presented by the company in its annual accounts.

Using the NPV (net present value) formula, the expected cash flow estimates have been calculated (justified in the “Cash Flows” section), giving a net present value of $616, taking into account the estimated cash flows up to 2020.

Assuming a cash flow for the year 2025 of $209, a long-term growth of 2%, and the WACC obtained after the various estimated calculations of 7.5%, a present value of $3841 has been obtained, which, discounted for the next 4 years, manages to generate a value of $2872.

Adding the net present value obtained and the discounted present value, we obtain a capitalization value of 3488, where subtracting the financial debt of the company (being negative, it presents a positive value of 173), and dividing this result by the total shares of the company, we obtain a target market price of $66.02, a value above the current market price of the company on December 31, 2021 (52.94), indicating an undervaluation in the price of the company.

Technical analysis

Before starting the estimates through technical analysis, it should be noted that this methodology uses different periods to understand the evolution of a chart.

For the long term, it is usually used comprehensions from one week to one month to 200 sessions; for the medium term, one week; and for the short term, 60, 30, 15 and even 5 minutes.

Therefore, the present analysis will use the two-week to 200-session comprehension to establish a long-term perspective, minimizing non-relevant disturbances for the long term and gaining reliability in its estimation.

The objective through the use of this methodology is to be able to answer whether or not we are facing a good time to buy, analyzing the evolution of the company and the different variables that could generate an overbuying/selling in the market share price.

The study of this model has been carried out through its ADR (value in US dollars), due to the absence of the Canadian market in the “Pro Real Time” study platform, obtaining for practical purposes the same result.

RSI & Volume & Resistance Meter

Enghouse presents a primary uptrend, being located at resistance levels and generating a possible entry opportunity.
In the lower part of “Illustration 28”, we can see how the volume of shares presented in this period is stable, in addition to the RSI indicator, established by period 30 (long term), and time lines of 25 (entry) and 75 (exit).

The RSI indicator allows us to evaluate the strength in the variation of the share price through impulses in the price variation, expressing a possible signal of overbought/sold in the share price.

The indicator will be able to pick up the share price for the last 60 weeks, giving a signal of appreciation for the period from week 60 to week 120, reported at the present time.

Currently, the company does not present a clear entry opportunity, although its downtrend could indicate an entry signal in a short period of time.

ATR Meter & Bollinger Bands

At the bottom of “Illustration 29”, we can observe the ATR indicator, programmed under a 14-period level, measuring the current volatility that the stock is experiencing.

Currently, the company’s price is in a period of high volatility, which makes us aware that there could be more accentuated variations than normal, both upwards and downwards.

On the other hand, it shows us the “Bollinger Bands”, an indicator used to show the variation that could occur in the stock through the use of bands, expanding in periods of high volatility (such as the current one), and contracting in periods of low volatility.

By using a simple 20-period moving average (intermediate line), and a standard deviation of 2, we can observe the oversold condition of the stock on January 2021, being at rising lows below the lower band, and indicating a good time to enter the share price.

MACD Meter & Average Crossover

The Average Crossover indicator shows a possible change in the company’s price trend, by using two simple averages of 50 and 200 periods (long term).

As we can see in “Illustration 30”, when the 50-period simple moving average crosses the 200-period simple moving average upwards, it allows us to obtain an oversold signal in the share price, thus projecting its uptrend, after the strong buy signal generated in the long term.

On the other hand, the MACD indicator has been programmed in the short term (fast moving average of 12, slow of 26 and exponential line of 9 periods), to see the discrepancy that could exist through different purposes, indicating a good time to exit the stock, since the fast moving average (50 periods) is below the slow (200 periods).

For this reason it is very important to define what our time objective is going to be before starting any type of valuation, being the one of the present analysis longplacist, being able to avoid the signal generated through the MACD, and consider only the signal produced by the Crossing of averages, offering an opportunity of profitable investment in the long term in the quoted price of the company.

Final analysis and conclusions

Enghouse Systems Ltd. has managed to prove to be a company with a very interesting future development potential, involving profitability shown in its analysis well above the market average.

After the analysis of the company, we can corroborate the viability presented in its business model, with particularities that make the difference against its competition, both qualitatively (pricing power, anti-cyclical sector, high replacement costs, etc.) and quantitatively (returns on capital obtained, high cash generation, goodwill, etc.).

Furthermore, these results have been obtained without financing its operations through debt, as the balance sheet does not contain any item that uses debt to justify the company’s good performance, once again demonstrating 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.

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 discounted cash flows, valuation multiples and long term technical analysis.

The valuation multiples have shown an undervaluation of the company with respect to its competitors in all the approaches used.

Likewise, after projecting earnings in line with the growth policy stipulated by the company, an average future yield of 15.35% was 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 once again a real price above its market value.

Finally, with regard to the technical analysis, once this undervaluation of the share was known, we proceeded to determine whether this was a good time to enter the market, focusing on the long term and managing to obtain a potential entry signal in most of the variables analyzed.

Therefore, as of December 31, 2021, Enghouse presents a possibility of revaluation in its share price, after presenting characteristics that make the company a viable choice with a view to obtaining recurring profits in the long term.

Bibliography

Beck, D. P. (2021, 4 febrero). Invertir en Enghouse Systems: Tesis de Inversión. Bolsaexpertos. Recuperado 23 de diciembre de 2021, de https://www.bolsaexpertos.com/invertir-en-enghouse-systems/

Canfranc, M. R. (2020, 15 octubre). Qué significa invertir en capital riesgo. BBVA NOTICIAS. Recuperado 27 de diciembre de 2021, de https://www.bbva.com/es/que-significa-invertir-en-capital-riesgo/

Constellation Software. (s. f.). Constellation Software Overview. Recuperado 24 de diciembre de 2021, de https://www.csisoftware.com/overview

Dennis, B. (s. f.). Enghouse Systems: The Crystal Ball Acquirer. Stratosphere Investing. Recuperado 2 de enero de 2022, de https://www.stratosphereinvesting.com/company-reports/enghouse-systems-engh-stock/

Enghouse Systems. (2022, 31 enero). Financial Reports / News. Recuperado 2 de febrero de 2021, de https://www.enghouse.com /

Escribano, G. (2021, 16 diciembre). La Fed acelera el tapering y anticipa tres subidas de tipos en 2022. Cinco Días. Recuperado 25 de diciembre de 2021, de https://cincodias.elpais.com/cincodias/2021/12/15/mercados/1639593426_189369.htmlDavid, S. C. (2022, marzo). Análisis Económico-financiero «Constellation Software». URJC.

Five9. (s. f.). About Five9: The Leader in Cloud Contact Center Software. Recuperado 25 de diciembre de 2021, de https://www.five9.com/about

Genesys. (s. f.). Our Story – Who We Are. Recuperado 24 de diciembre de 2021, de https://www.genesys.com/company

Google. (s. f.). Enghouse Systems Limited (ENGH) Stock Price & News. Google Finance. Recuperado 23 de diciembre de 2021, de https://www.google.com/finance/quote/ENGH:TSE?sa=X&ved=2ahUKEwi60b7T-N_1AhVDLn0KHSwhBGUQ3ecFegQIEBAc

Gutiérrez, D. (2021, 1 julio). Enghouse Systems Limited compra Vidyo por 40M$ | Baker Tilly GDA. Baker Tilly M&A Global Deal Advisory. Recuperado 13 de enero de 2022, de https://bakertillygda.com/enghouse-systems-limited-compra-vidyo-por-40m/

Indicadores de desarrollo mundial. (s. f.). Google. Recuperado 20 de diciembre de 2021, de https://www.google.com/publicdata/directory

Koyfin. (s. f.). Data Driven US Stock Market Valuation and Analysis. Current Market Valuation. Recuperado 22 de enero de 2022, de https://www.currentmarketvaluation.com/

Market Screener. (s. f.). ENGHOUSE SYSTEMS LIMITED : ENGH Stock Price | CA2929491041 | MarketScreener. Recuperado 2 de diciembre de 2021, de https://www.marketscreener.com/quote/stock/ENGHOUSE-SYSTEMS-LIMITED-1409921/?type_recherche=rapide&mots=enghouse

National Statistical Office. (s. f.-a). Statistics Canada: Canada’s national statistical agency. Recuperado 18 de diciembre de 2021, de https://www.statcan.gc.ca/en/start

Salesforce. (s. f.). What is Salesforce? Recuperado 25 de diciembre de 2021, de https://www.salesforce.com/ca/products/what-is-salesforce/

TIKR Terminal. (s. f.). TIKR: Institutional-Grade Investing for Individuals. Múltiplos – Ratios sobre empresas del sector. Recuperado 2 de enero de 2022, de https://app.tikr.com/stock/financials

Trading Eeconomics. (s. f.). TRADING ECONOMICS | 20 million INDICATORS FROM 196 COUNTRIES. Recuperado 19 de diciembre de 2021, de https://tradingeconomics.com/

OECD. (s. f.). OECD Statistics. Recuperado 1 de enero de 2022, de https://stats.oecd.org/

OpenText. (2021, 18 noviembre). About us. Recuperado 25 de diciembre de 2021, de https://www.opentext.com/about

Optiva Inc. (2021, 27 diciembre). Telecommunications Monetization & Revenue Management Software │. Optiva. Recuperado 25 de diciembre de 2021, de https://optiva.com/our-approach/

Oracle. (s. f.). About Oracle. Recuperado 25 de diciembre de 2021, de https://www.oracle.com/corporate/

Santander. (s. f.). Política y economía Canadá – Santandertrade.com. Santandertrade. Recuperado 9 de enero de 2021, de https://santandertrade.com/es/portal/analizar-mercados/canada/politica-y-economia

SherifSamy. (s. f.). (2020). Enghouse Systems: Bullish In Its Business, Bearish In Its Stock Price. Seekingalpha. Recuperado 2 de enero de 2022 de: https://seekingalpha.com/article/4342752-enghouse-systems-bullish-in-business-bearish-in-stock-price

Suero Cobos, D. (2022, febrero). Análisis económico-financiero Constellation Software Inc. Rey Juan Carlos. TFG Grado Administración y dirección de empresas URJC (Pendiente a defensa marzo 2022).

Video Conferencing Market Size & Share Report, 2021–2028. (s. f.). Grand View Research. Recuperado 3 de enero de 2022, de https://www.grandviewresearch.com/industry-analysis/video-conferencing-market

Wall St, S. (2021, 22 noviembre). Enghouse Systems Limited’s (TSE:ENGH) Intrinsic Value Is Potentially 89% Above Its Share Price. Simply Wall St News. Recuperado 26 de enero de 2022, de https://simplywall.st/stocks/ca/software/tsx-engh/enghouse-systems-shares/news/enghouse-systems-limiteds-tseengh-intrinsic-value-is-potenti-1