On today’s TSX Breakouts report, there are 49 stocks on the positive breakouts list (stocks with positive price momentum), and seven stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a little-known growth stock that’s listed on the TSX Venture Exchange. If analysts' expectations are correct, the stock will resurface on the positive breakouts list. The average one-year target price suggests the share price may rally 43 per cent over the next 12 months. The company recently completed an equity financing, shoring up its balance sheet and providing the company with the financial flexibility to fund an opportunistic acquisition. The stock has a unanimous buy recommendation from four analysts.
The company highlighted today is Sangoma Technologies Corp. (STC-X).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Ontario-based Sangoma is a provider of cloud-based (e.g. cloud-hosted phone systems for small and medium businesses and contact centers) and on-site communications (e.g. on-premises business phone systems) products and services.
The company’s revenue can be categorized into two core segments: product revenue and service revenue. Last quarter, service revenue exceeded product revenue for the first time.
Service revenue has been steadily expanding, now totaling over 50 per cent of total revenue. In fiscal 2018, service revenue averaged approximately $5-million per quarter. In fiscal 2019, service revenue represented roughly $10-million per quarter. This fiscal year, service revenue has averaged over $15-million per quarter. For the first nine months of fiscal 2020, service revenue represented 47 per cent of total sales, up from 33 per cent realized during the first nine months of fiscal 2019. This rising trend is positive as it provides earnings visibility due to the recurring nature of service revenue as well as attractive margins.
The company has a diversified customer base with no individual client representing more than 10 per cent of sales. Sangoma serves clients across a variety of industries including manufacturing, military, government, transportation, retail, technology and aerospace. Amongst its customers are well-recognized companies such as Domino’s, Spotify, AT&T, QVC, and Brooklyn Law School. Given the company’s international exposure, currency fluctuations can impact the company’s financial results.
Management is focused on achieving both organic and acquisition growth. Organic, or internal, growth is fueled by new product and service offerings. To illustrate, the company recently launched Sangoma Meet, a cloud-based service that facilitates video conferencing and video connectivity - an essential service with many people now working from home.
Investment thesis highlights
- Potential near-term catalyst. On July 30, the company completed an $81-million bought deal financing issuing over 35-million shares at an issue price of $2.30 per share. An opportunistic acquisition could be announced in the weeks or months ahead.
- Proven growth. The company reported sales of $109.65-million in fiscal 2019, $57.4-million in fiscal 2018, and $26.9-million in fiscal 2017. Reported EBITDA (earnings before interest, taxes, depreciation and amortization) was $12.3-million in fiscal 2019, $6.8-million in fiscal 2018, and $2.6-million in fiscal 2017.
- Rising percentage of high-margin, recurring service revenue - now representing over 50 per cent of total sales.
- Potential for greater visibility. CIBC World Markets and Canaccord Genuity Corp. were included in syndicate of underwriters in the recent equity financing. Consequently, I would not be surprised to see analysts from these firms initiate coverage on the company in the future.
On May 27, the company reported better-than-expected third-quarter fiscal 2020 financial results. Sales were a record $36.3-million, up 26 per cent year-over-year and exceeded the Street’s forecast of $35.7-million. Gross margin was 65 per cent, up from 62 per cent reported during the same period last year. EBITDA came in at $6.51-million, above the consensus estimate of $5.98-million. Earnings per share came in at 2 cents.
On Aug. 13, management indicated that its year-end financial results for fiscal 2020 would come in at the upper end of its previously issued guidance, anticipating sales to be between $131-million and $132-million and EBITDA to surpass $21-millon. In May, management guided to revenue of between $128-million and $132-million in fiscal 2020 and EBITDA to be between $19-million and $21-million. The company will be releasing its fiscal 2020 financial results this month.
The company does not pay its shareholders a dividend.
This small-cap tech stock with a market capitalization of $283-million is covered by four analysts, and all four have “buy” recommendations.
The firms providing analyst coverage on the company are: Acumen Capital, Beacon Securities, Cormark Securities, and PI Financial.
In July, three analysts revised their target prices with mixed expectations.
- Cormark Securities’ Gavin Fairweather to $3.30 from $3.50.
- Acumen Capital’s Nick Corcoran to $4 from $3.50.
- PI Financial’s David Kwan to $4 from $3.
The company’s fiscal year-end is June 30.
The Street is forecasting revenue of $131-million in fiscal 2020, up from $109.65-million reported in fiscal 2019, and $146-million in fiscal 2021. The consensus EBITDA estimates are $21-million in fiscal 2020, up from $12.3-million reported in fiscal 2019, and $25.4-million in fiscal 2021. The earnings per share estimates are 4.5 cents in fiscal 2020 and 7.5 cents in fiscal 2021.
Earnings expectations have inched higher in recent months. To illustrate, three months ago, the consensus revenue estimates were $129.5-million for fiscal 2020 and $144-million for fiscal 2021. The consensus EBITDA estimates were $20.1-million for fiscal 2020 and $24.8-million for fiscal 2021.
According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 2 times the fiscal 2021 consensus estimate and at an enterprise value-to-EBITDA multiple of 11.7 times the fiscal 2021 consensus estimate.
The average one-year target price is $3.64, implying the share price has 43 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $3.25 (the low on the Street is from Gabriel Leung, the analyst at Beacon Securities), $3.30, and two at $4.
Insider transaction activities
In the second half of 2020, there has not been any trading activity in the public market reported by insiders.
Year-to-date, the share price is relatively unchanged, up 2 per cent. While this may seem unimpressive, the share price has fully recovered from the swift and steep slide experienced in March during the height of the COVID-19 pandemic. Between March 10-18, the share price collapsed 45 per cent, closing at $1.17 on March 18. The share price has since bounced back, closing at $2.55 on Oct. 9.
In terms of key resistance and support levels, the share price has a major ceiling of resistance around $2.80, at its record closing high reached on July 6. Looking at the downside, there is strong technical support around $2.20, close to its 200-day moving average (at $2.22).
The stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 260,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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