Enghouse Inc.
(esl:TSE - $9.65)
Recommendation: BUY
Target: $17.50
Enghouse announces $24 million, 4.5 year, contract with IBM Japan. A
technology company with $65 million in cash and real earnings.
Initiating coverage with a BUY Recommendation.
Shares O/S
52-week
Projected
EPS (YE Oct 31)
P/E
(millions)
High
Low
Dividend
Total Return
00E
01E
02E
01E
02E
11.6 (f.d.)
$14.90
$4.75
Nil
80%
$0.64*
$0.79
$0.99
12.2x
9.75x
*Excluding $1.4 million charge in Q1 2000.
Developments:
n On November 29, 2000, Enghouse announced that it has signed a multi-year maintenance support agreement (to March 31, 2005) with IBM Japan valued at over $24 million CDN. The contract covers both enhancements and support of Enghouse’s GeoNet GIS engine, which forms part of an operations support system (OSS). Enghouse, IBM Japan and NTT Comware jointly developed this engine for Tokyo-based NTT, one of the world’s largest telecommunications companies.
n Under the terms of the contract Enghouse receives $5.0 million as an advance payment for the first year. As a result, Enghouse will have a cash balance of $65 million dollars or $5.60 per share.
n We expect the company to report fully diluted EPS, on an operating basis, of $0.64 for the year ended October 31, 2000. Our forecasts for fiscal 2001 and fiscal 2002 call for earnings per share of $0.79 and $0.99, respectively.
n In addition, the assumption of the Chairman and CEO role by Mr. Stephen Sadler bodes well for the company’s future growth. Enghouse, under the direction of Mr. Sadler, is embarking on a new strategy of acquiring, building and spinning off technology companies in order to build shareholder value. In addition to this new strategic initiative, Enghouse’s very successful existing division involved in the AM/FM/GIS market will continue to develop products and build its client base.
n We believe the market was waiting for a resolution of the IBM Japan / Enghouse contract situation. This high-risk component has now been resolved. With the finalization of this contract, we believe revenues from the core AM/FM/GIS business will be in the range of $25.9 million for fiscal 2001, increasing by 19% in fiscal 2002 to $30.9 million.
n Enghouse shares are currently trading at 12.2x and 9.7x forecast fiscal 2001 and fiscal 2002 earnings per share respectively. However, the company currently has $65.0 million, or $5.60 per share, in cash. Netting out Enghouse’s cash per share of $5.60, the company’s shares are trading at 6.3x our fiscal 2000 expectation of $0.64, 5.1x fiscal 2001 forecast EPS of $0.79 and 4.1x forecast fiscal 2002 EPS of $0.99.
Recommendation:
§ We are initiating coverage of Enghouse Systems with a BUY recommendation. Taking into account current market conditions we are conservatively using a 15x P/E multiple, despite our forecast EPS growth of 23% and 25%. Adding in the important cash component results in a 12-month target price of $17.50. This target price provides investors with a potential return of 80% and we believe an investment in Enghouse shares is appropriate for investors with above average risk tolerance.
Mike Middleton, CFA
Associate: Mark Lerohl
November 30, 2000 (416) 361-2005
(416) 202-6666
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