Cognicase in Financial Post's Hot Stock profile
Tuesday, February 08, 2000
Investors applaud Cognicase moves
Boost for growth: National Bank deal spells capital and critical mass
Thomas Hirschmann
Financial Post
Cognicase Corp. has taken it up a notch. Last Wednesday, National Bank of Canada, the largest bank in
Quebec, brought the e-business and Internet information technology company into the fold by undertaking to
merge it with its own IT arm.
The bank agreed to merge SIBN Inc., which develops the bank's technology, with Cognicase to delve deeper
into e-commerce. Shareholders have applauded the deal, driving the share price up as much as 82% in the
past week and taking out a new high of $47.25. In Toronto the shares (COG/TSE) closed up 65½ at $43.25
yesterday, and, in New York (COGI/NASDAQ), up 13/16 at $29 13/16 (US).
"As far as e-business is concerned, it's a vehicle to channel them forward," says Damian Rinaldi, an analyst at
First Albany Corp., part of the company's underwriting syndicate for its initial public offering. The keys to the
deal for Cognicase are capital and critical mass: "They now have a strong partner with deep pockets."
Cognicase will issue 9.29 million shares, making the deal a $232-million stock transaction. That means control
of the company lies with National Bank, the single largest shareholder with a 35% stake and five of the nine
seats on Cognicase's board. A holding company will be created for National Bank's stake and Cognicase chief
executive Ronald Brisebois' 8%.
In addition, National Bank will invest $20-million by buying treasury shares, or non-voting stock that Cognicase
will buy back to place in its treasury.
Significantly, Cognicase will become the preferred IT supplier to the big bank and its affiliates for the next 10
years. The Montreal-based company estimates that at current levels of business, SIBN should add about
$1.2-billion in sales during that period. Cognicase also believes it is in a good position to solicit up to
$225-million in additional contracts from the bank and its affiliates. It says the deal positions it well in the
financial services, telecom, utility and government markets.
Mr. Rinaldi has crunched the numbers and come up with a value for the overall transaction. He expects to see
an extra $30-million to $40-million at the top line in this fiscal year as a result of the accretive SIBN deal, based
on a May closing date. His estimate of 19% growth in fiscal 2000 over fiscal 1999 has been revised up to
around 44% -- more than double.
The combined Cognicase/SIBN will have more than 3,500 employees and 2,000 customers, the company says.
Run-rate revenues will be around $265-million (US) and the all-important backlog will exceed $1-billion over 10
years.
"With that backlog it will be much easier to hit targets," says Mr. Rinaldi. "Investors like predictability."
Cognicase released its results yesterday for the first quarter of fiscal 2000, ended Dec 31. It said revenues
increased 17% to $44.2-million (US) compared with $37.9-million (US) in the fourth quarter. Revenues were up
27% compared with the year-earlier period.
Of particular importance in light of the National Bank deal was the 56% increase in e-business revenues, which
now account for 15% of total revenues.
However, expenses increased as the company supported that push into e-business. Research and
development costs rose 163%, and additional expenses were incurred in launching its Internet Technologies
and Internet Innovations divisions. Internet Technologies will focus on Internet and wireless software solutions
while Internet Innovations will help start and develop new Internet companies.
With the two new units, Cognicase has positioned itself to present a more visible set of propositions, says Mr.
Rinaldi. "[With the new units and SIBN] it will be easier for investors to see value."
The stock had been languishing during the past six months or so, as had most IT services companies. "The
stock fell out of favour in the run-up to Y2K. But Cognicase is less generic, and more forward-looking."
Cognicase has been making acquisitions to position itself advantageously post-Y2K. "Previously the stock was
trading exclusively on Y2K initiatives. It has made the transition into a post-Y2K environment better than the
comparables," says Mr. Rinaldi. The latest partnering was "a milestone" in its business initiative. "It takes the
partnering up a notch."
Given how well Cognicase has integrated previous acquisitions, he expects few difficulties digesting this one.
COGNICASE INC.:
CEO: Ronald Brisebois
Ticker: COG
Listed: Toronto Stock Exchange
Head office: 2000, 1080 Beaver Hall Hill Montreal, Quebec H2Z 1S8
Telephone: (514) 866-6161
www.cognicase.ca
INCOME STATEMENT:
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
09.99 06.99 03.99 12.98
Operating revenue $000s 37,873 36,103 36,028 34,913
Net income $000s 3,937 3,223 3,291 2,848
Earnings per share $ 0.26 0.21 0.24 0.22
Cash flow operations $000s 6,195 3,526 (2,649) (1,209)
Cash flow operations per share $ 0.40 0.23 (0.198) (0.095)
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
09.98 06.98 03.98 12.97
Operating revenue $000s 24,726 19,987 10,319 4,084
Net income $000s 2,890 2,475 1,291 1,815
Earnings per share $ 0.24 0.20 0.11 0.16
Cash flow operations $000s 4,944 894 1,569 1,087
Cash flow operations per share $ 0.40 0.07 0.13 0.10
P/E ratio: 31.79 Dividend yield: n.a. (at 2/4/00) in US$
RATIOS:
09.99 09.98 09.97 10.96
Return on equity 12.75 21.54 10.36 33.06
Return on assets 9.54 14.49 8.31 17.26
Total debt/equity 0.01 0.07 . . . 0.11
Current ratio 1.87 1.49 6.78 1.98
Avg. price/book value 2.2 2.6 n.a. n.a.
Avg. price/cash flow 48.1 20.9 n.a. n.a. |
