Sylogist: A Niche Tech Grower With A 3.6% Dividend – Sylogist Ltd. (OTCMKTS:SYZLF)

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Investment case

Sylogist (OTC:SYZLF) is a niche tech company with good growth, a stable and increasing dividend (3.63%) at a good price.

The Canadian-based Sylogist has been lagging since 2018. With more growth on the way, I will take a close look at this stock and what to expect. Sylogist’s financials are excellent and growth prospects are excellent as well. At this price, it’s a good time to get in. Share price fell from 14 CAD in November 2018 to 11 CAD today. The share price is now at the same level as 5 years ago, despite rapid growth during this period. Over the last 9 years, it has been continuously paying an increasing dividend. The dividend rate since this quarter is 0.10/quarter or 3.63% annually. It’s hard to find another growth stock that pays such a high dividend! Because it’s a Canadian company, all numbers are expressed in Canadian dollars.

Source: Yahoo Finance

Sylogist still trades at the same level it achieved in 2015 and 2016. Let’s see if this is the correct price.

About Sylogist

Sylogist Ltd. is a Canadian company that grows by strategic acquisitions of small software companies active in solutions for public services. They were successful in expanding their business through these acquisitions and organic growth.

Sylogist is a provider of Enterprise Resource Planning (ERP) solutions for public service organizations including K-12 school districts/boards, public sector, nonprofit organizations (NPO), international non-governmental organizations (NGO), manufacturing and warehousing/distribution. These public service solutions are trusted by over 1,000 organizations worldwide.

Sylogist solutions continue to be selected because of its expertise, ongoing investment in product and platform enhancements and its track record of delivering integrated products and exceptional services that meet public service customer’s unique needs.

Sylogist, operating as Serenic Software, has offices in Calgary and Edmonton, Alberta, Toronto Ontario, Atlanta Georgia, Lakewood Colorado, Richmond Virginia and Oxford Oxfordshire United Kingdom.

Source: Sylogist website

Sylogist is active in a very stable sector. Macroeconomics doesn’t affect its business model. In uncertain times this is a nice extra.

The company increases revenue through organic growth and strategic acquisitions. It was very successful this way in the past. Recently, most growth has been coming from SaaS (Software as a Service). Its experienced management will continue to build Sylogist like this. The education ERP sector is looking at rapid growth. The focus of Sylogist on this niche tech sector is one of its strengths.

Given the nature of the Company’s product offering and the importance to its customers, the average customer life is more than 10 years. Some customers have been using the Company’s software for several decades, with the Company’s historical customer retention rate at over 90%.

Source: Latest management discussion and analysis

I like that this company is active in such a stable business with a loyal clientele. This assures a lot of future cash flow. Subsequently, dividends and buybacks are safe as well. This also means a higher valuation for this company is undoubtedly allowed.

More info about the growth of the education ERP software market:

The factors driving the growth of the education ERP software market are need for operational efficiency and transparency in education sector and adoption of cloud and mobile applications.

Source: globalnewswire.com

Growth rate

In this analysis, I am looking for what a realistic valuation of Sylogist should look like apart from the quarter-to-quarter divergences. In the short term, results fluctuate, but I’m an investor for the long term. By thorough analysis, I determine the true value of the company. First, I’ll take a look at the growth rate and project this realistically into the future.

Over the last 9 years, Sylogist achieved the following growth rate:

2009

2018

CAGR

Revenue per share

0.55 CAD

1.69 CAD

13.29%

EPS

0.09 CAD

0.58 CAD

23.00%

EBITDA per share

0.11 CAD

0.75 CAD

23.77%

EBITDA margin

20.00%

44.00%

Source: Author’s own calculations based on yearly statements

As shown in its latest annual statement, these growth rates even accelerated over the last 5 years:

Revenue growth Sylogist (SYZ)Profit per share growth Sylogist (SYZ)EBITDA per share growth Sylogist (SYZ)Source: Sylogist 2018 earnings

The management provides a positive outlook for the future and expects these growth rates to continue. It keeps increasing the dividend accordingly. It doesn’t grow each quarter and is dependable on the timing of acquisitions and large contracts. They have very stable and long-term clients which makes it a steady and profitable business.

For a correct valuation, I should also keep the net cash position of 1.41 CAD per share in mind. If I discount the current cash, currently, P/E is just 16. Which is pretty low for such a growing enterprise. To calculate the net cash position, I used a different definition than the company. I only counted its real cash without inventories and receivables. I also deducted all the current liabilities.

In the latest quarterly statemented, they claimed a cash position of 2.09 CAD which included all current assets and excluded deferred revenue which should be viewed as a liability because they still have to deliver on this. They have been delivering very well so this won’t be a problem in the future, but I do like to stay on the safe side.

Earnings distribution

Sylogist Revenue

Source: Management Discussion and Analysis

Sylogist earnings are well distributed among four categories. Product sales have a large impact on single quarters. Growth mostly comes from stable subscription and maintenance earnings. This graphic shows perfectly how Sylogist is a stable grower throughout the past 5 years if you look past quarter-to-quarter hikes and lows.

Future

The company has a strong growth in SaaS which grew organically 29% the first 9 months of this fiscal year. Growth in this segment makes Sylogist future-proof. It plans to do more acquisitions which support its growth further. I made some projections to show what to expect from this growth and how the share price could react to this.

Let’s project this to the future. To be safe I use a CAGR of 13% which is obtained on the revenue the last 9 years. I expect EBITDA and earnings to follow the same growth rate as the revenue. This means as a result in 5 years its profits per share will be increased to 1.08 CAD. At a P/E ratio of 20, this means the share price should rise to 21.6 CAD as well. If I then take into account the dividends Sylogist will keep paying this adds another 2 CAD (5 x 0.40 CAD) in cash returns over the next five years. This should be more since the company increases its dividend as often as possible and has been increasing it yearly. This means a more than 110% return in 5 years of which 18% is in cash.

Latest quarter

Sylogist’s latest quarter ended 30 June of 2019. It was the third quarter of this fiscal year. The revenue and profit were lower because of a one-time large contract in 2018. The repeatable revenue and profit did increase as expected at a rate of 8%. The slower growth in the latest quarters could explain why the company is trading below the historical ratios. The company has had slower quarters before and always managed to get back to a solid growth rate. I expect this will continue so in the future. They do expect a large contract again in the coming quarter. This will boost financial results and give confidence to the market.

Dividend increases

The company started paying dividends in 2010. They have been increasing dividends at least once a year with at least 0.05 CAD quarterly. Soon they will be paying and increasing the dividend for 10 consecutive years. The company has a payout ratio of about 66% of its cash generation. This is rather high, but certainly sustainable because of the solid balance sheet.

Buybacks

Sylogist has currently a buyback program running for a maximum of 10% of its market cap. This supports the share price and prevents further dilution due to the exercise of stock options by its management. The management has been using buybacks opportunistically in the past. It also states it will continue to do so in the future.

As stated the company does have a large net cash position to use. They are looking at more acquisitions to build the company up further. Sylogist will also use the cash to continue the buyback program.

Balance sheet

As stated before, Sylogist has a positive net cash position. There is no long-term debt so this won’t be a problem. There are no plans to add debt for new acquisitions since Sylogist has a large cash position available. The balance sheet proves this is a stable and low-risk company.

Management

The management is experienced and stable. A lot of managers have been on board for more than 10 years. This shows the experience they have in acquisitions has worked. I have a lot of confidence this management will be able to continue its work as before.

The management is partially compensated with stock options which ensure they will be acting in the best interest of shareholders as well. These stock options are limited to 10% of outstanding shares which prevents too much dilution.

Recently (news release 09-26-2019), the management also stated they will use a percentage of their after-tax cash bonus compensation to purchase Sylogist stock. This comes forth from discussions with large institutional and individual investors. They want a more equity-oriented compensation plan based on the stock performance. This will keep the management focused on creating shareholder value.

Risks

Quarter-to-quarter results could disappoint and growth won’t be as steady as on a long-term basis. Over the last five years, the company has been growing at a CAGR of over 20% which probably isn’t sustainable. This could be disappointing to investors in the short term. In the long term, the growth rate looks safe. Dividends and buybacks will support the share price.

Another risk is the acquisition of new businesses. It’s possible the integration doesn’t go as smoothly as in the past and customers could be lost after an acquisition. Sylogist has been good at acquisitions and this risk should be limited because of the experienced management.

Do note that Sylogist’s ticker here (SYZLF) are the shares trading on the U.S. market. They have a really low volume and could provide liquidity problems. If possible you should buy them on the Toronto home market.

Comparison to similar companies

It’s hard to find companies operating in the same sector. Sylogist is a small niche tech player while competitors are often much larger, but don’t focus on the same sector. I picked two stocks to compare Sylogist’s ratios with to show it’s priced too cheap.

Sylogist Enghouse Systems (OTCPK:EGHSF) Oracle Corporation (ORCL)
Total Revenue 39 million CAD 360 million CAD 52 billion CAD (converted)
P/E (TTM) 20.01 30.27 18.02
Price to Sales 6.74 5.49 4.5
Price to Book Value 4.37 5.24 9.67
Dividend yield 3.72% 1.21% 1.77%

Source: investing.com

The first one is Enghouse Systems, also a Canadian software company that has been growing strong. Enghouse is trading at much higher multiples which puts more pressure on strong growth in the future.

Secondly, I put Oracle on the comparison table. This much larger company is also active in ERP systems but has been struggling to grow in recent years. The company also carries a lot more debt. It will have a harder time growing in the future considering the total revenue of 52 billion CAD vs. 39 million CAD for Sylogist. Still, it’s priced more or less similar when we look at the ratios.

In comparison, I find it very clear that Sylogist is below true value at this moment. I expect this will clear up in the future as the company shows the efficiency at which it continues to grow.

Conclusion

Sylogist is an unknown tech stock with great prospects. It’s active in two interesting segments: the public sector division and private sector division. With more acquisitions of new software companies, it will continue to grow.

It’s priced reasonably considering the growth potential and the profitability of the company. The increasing dividend makes it a very safe investment with an increasing cash return. They are active in a very stable and promising sector. The experienced management gives confidence in the future performance of this stock.

Disclosure: I am/we are long SYZLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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