Enghouse Systems (ENGH-T)

Essentially an 18% dividend increase every year. Taking on the MSFT business model for SaaS, as subscriptions smooth out margins from quarter to quarter. Recent acquisition announcement raised stock. Growing margins. Asset light, little debt. He likes these serial acquirers. 

ROIC is 15%, WACC is 8.5%. That means a ton of free cashflow to make acquisitions, pay off debt, rinse & repeat. It's a small cap now, and he anticipates it growing and gaining attention.

Not getting much love in the market. Cheaper than almost anything out there, yet keeps getting cheaper. Holding massive amount of excess cash; not using it to increase dividend or buy back shares, so it's in the penalty box. Value tends not to work in tech.

So much other great stuff out there now at reasonable prices.

A mini-CSU, because they have built by strategic acquisition well. It hasn't excelled like CSU, because they haven't scaled their business yet. He targets $36.50.

All his past picks on this date were small-caps and chosen, based on him expecting US interest rates to fall. All were turnaround plays. He used dollar-cost averaging. Fading interest in small-caps now, but he still likes ENGH. They are a serial buyer of private companies at good prices. Margins are rising so are increasing the dividend to 4.5%. But they're not large nor liquid. Is adding at these levels.

On his radar because it's a cheap software business, with high margins and recurring revenue. Lower valuation than CSU, but not as effective at consolidating. Disappointing results, organic growth weak, slower M&A. Strong balance sheet. Good insider ownership.

His 12-month target is $37, today it's at $27, so still a bit to go. Builds its business around acquisitions, both vertically and horizontally. Not in his fund, but in separately managed accounts. More of a trade than an investment.

He owned it when they were a typical Canadian compounder, reinvesting cash into tuck-ins, but it became lumpy. That's when he sold. They spiked during Covid, because they had a telehealth business, so YOY comps later didn't look good. Also, how does AI impact their large call centre business?

Small caps get whacked when interest rates rise. If investment-grade companies borrow at 6%, small caps borrow at 10%. Russell 2000 rallied after the election, and has fallen ~8% in December. ENGH has no debt. Strong FCF, dividend grows 15-20% every year.

Q4 earnings were a bit light, so stock's fallen. They also made 2 acquisitions in the quarter. With small caps, you have to be patient. Yield is 3.87%, almost unheard of for a small-cap stock. Switching business model to SaaS, which should improve margins over time and you'll eventually get increased profitability. Stock's at a new 52-week low, and he's buying.

Trend has gone sideways lately. Would recommend a watch phase. If stock begins to trend upwards, would recommend buying. 

EPS of 37c beat estimates of 35.7c. Revenue of $130.5M slightly beat estimates of $129.7M. EBITDA of $37.7M beat estimates by 4.6%. Revenue rose 18%. EBITDA rose 13%. Recurring revenue rose 22.8%. Net income rosr 17%. Seachange is being integrated well. Net cash is $245M. Nothing too extraordinary here, but a beat and decent overall growth. Earnings are expected to rise 13% in 2025. 
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Very frustrating. He stays because of the valuation. Massive free cashflow yield, debt-free. Not doing all it can to realize value for shareholders. Needs an activist. He's holding, and would buy today for new clients.

Likes it, especially for the long term. He owns it in a few separately managed accounts. Well run, financially disciplined. Cleaned up debt. Has $200M in cash. Focus is like a mini-CSU, but doesn't have the scale yet. 40 global acquisitions over its history. 12-month price target of $36.50.

Pick it up in thirds here around $30, $28, and $26.50.

Shares have fallen since the pandemic, but they've re-created themselves and changed their business model. Like MSFT, they stopped selling software and license it through subscriptions. So operating margins are starting to rise and they just raised the dividend by 18%. Also, they have strong free cash flows and the dividend is growing from 3.5%, rare for a smallcap.

He's traded in and out of it, not really invested for the long haul. Hasn't performed all that well. Builds the business the way CSU does, but without the success.

We need to see more commercial opportunities open up. All Canadian tech has rolled over, including ENGH. The space needs more acquisitions. If the companies don't grow quickly, they will decline, on relative terms.