70% Recurring-Revenues for 5.8x FCF
Also includes a 9% SH Yield while we wait for the re-rating.
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Today’s business is being priced for decline and death.
In fact, according to the market, the business will be completely gone in less than 6 years.
Never to generate any more cash, ever again.
If you understand how businesses work, the reality looks a little bit different.
For example, 70% of revenue is recurring and embedded deeply into customer work-flows.
The business is net-cash, has virtually no debt, and stable margins, despite some decline in top-line revenue.
The management team appears to be solid.
They don’t waste money and only make acquisitions where they underpay.
Oh, and they have also increased the dividend for 18 years straight.
This year’s base-dividend yield alone is now higher than the 5Y average, which was inflated by a large special dividend back in 2021.
The current market cap is $866.68m, and the EV is $610m.
The 5Y average FCF is roughly $105m per year, and I believe it’s reasonable to expect that to continue going forward.
This all gives us the following ratios:
NCAV = 6.5
TBV = 6.4
EV/FCF = 5.8
P/FCF = 8.2
These show that the balance sheet is a financial fortress of cash that gives the operating business a solid foundation.
When we combine this with the durability of the operating business, 5.8x FCF seems a bit cheap.
This is exacerbated by the fact that the SH yield is around 9% going forward.
Most of this comes from dividends, with the odd little buyback thrown in when management determines the stock price to be cheap.
The ownership structure also looks good.
An activist could build a stake, but they would probably have to align with at least a couple of existing shareholders to make any changes.
None of these existing shareholders have anywhere near enough votes to pull any kind of involuntary delisting at low prices.
Minority shareholders are protected.
Best of all, one of Canada’s most successful investors owns a 10% chunk of the stock, which indicates there is value in the business.
The core set up here is simple:
The market is pricing the earnings like they’re going to zero imminently, but the reason for the sell off doesn’t fully align with the cash-generation of the business in reality.
If we can build conviction in the durability of the FCF, then this looks like a pretty decent set up.
Let’s take a look…