Taking Some Healthy Profits

Posted by Ryan Irvine

on Wednesday, 22 November 2017 17:23

This month, we update three stocks KeyStone has recommended in this column over the past several years. Two we reiterate our BUY recommendations and on the third we take our healthy profits recommending investors SELL following the company’s merger/takeover agreement.

Without further ado, today I am updating Ebix Inc. (EBIX:NASDAQ), a U.S. Small-Cap we have recommended for the past 2-years, initially below the US$30 level. The stock has been highlighted several times over the past two year on KeyStone’s MoneyTalks Radio appearance including in November 2015 with the shares trading at US$31.40 and in March of 2016 with the stock trading at US$41.18.

We are happy to report the stock is today trading at $76.45 range after reporting record numbers in its most recent quarter and a positive outlook. Given the strong move, it is a prudent time to update readers on our current rating.

An excerpt from our most recent update on the stock.


Industry: Technology - Software

Recommended: July 2015

Recommendation Price: US$29.36

Current Price: US$74.00

Market Cap: US$2.33 billion

Shares Outstanding: 31,490,000

Fully Diluted: 31,637,000

Yield: 0.40%

Ebix is a leading international supplier of so ware and e-commerce solutions to the insurance and financial industries. The company provides a series of application so ware products for clients ranging from carrier systems, agency systems, and exchanges to custom so ware development for all entities involved in the insurance and financial industries. Ebix’s goal is to be the leading backend powerhouse of insurance transactions around the world. The company’s technology vision is to facilitate convergence of all insurance channels, processes and entities in a manner such that data can seamlessly flow once a data entry has been made. With a recurring revenue base of approximately 80%, Ebix strives to work collaboratively with clients to develop innovative technology strategies and solutions that address specific business challenges. Ebix combines the newest technologies with its capabilities in consulting, systems design and integration, IT and Risk Compliance Solutions, applications so ware, and Web and application hosting to meet the individual needs of an organization.

Investment Highlights

×         Strong Track Record - 17 Consecutive Years of Growth.

×         Substantial Initiatives in Place to Grow Revenues and Margins

×         Utilities Based Revenue Model - 80% +/-Recurring Revenues.

×         Attractive Valuation Relative to Market Peers.

×         Directors and Executive Officers Own Approximately 14% of the company.

Financial Results

Q3 2017 Results: EBIX reported another record quarter in Q3 2017 with revenue increasing 24% to $92.8 million compared to the previous year. The revenue growth reflected strong performance in the company’s exchange channel as well as higher revenue from the risk compliance channel with the revenues from the financial exchange service reflected in the exchange channel.

Operating income for Q3 2017 rose 15% to $27.9 million compared to $24.3 million in Q3 of 2016. Q3 2017 operating margins remained consistent at 30% compared to Q2 2017 and were down compared to 33% in Q3 of 2016. Excluding the impact of the recent ItzCash acquisition, Q3 2017 operating margins would have been 33%.


EBIX has reported earnings of $3.09 per share over the past twelve months which equates to a valuation multiple of 24 times at the current price. This is roughly on par with the current market valuation of the S&P 500 and meaningfully below valuations for most technology and so ware companies with similar fundamentals (growth, margins and operating characteristics) where multiples above 30 to 40 times are common. We believe that the strong fundamentals underlying EBIX’s business warrant a valuation premium to the overall market.


EBIX reported the highest quarterly revenue in its history in Q3 and continues to maintain solid operating and growth momentum.  e company has put in place several initiatives which are expected to result in significant revenue growth and margin expansion over the next 6 to 18 months and beyond. These include several acquisitions and a joint-venture completed since May which are expanding the company’s footprint in high-growth emerging markets like Asia and Latin America. According to management, the company’s pipeline of organic and acquisition-related opportunities is better than it has ever been. We heard a similar level of optimism from management when we first recommended the stock in July of 2015. Since that time, the company has produced substantial growth in revenue and earnings per share and the stock price is up over 155% (5 times the NASDAQ average over the same period).

Ebix currently trades at a trailing price-to-earnings valuation of 24 times. This remains roughly on par with the market average (based on the S&P 500) and a significant discount to most technology and so ware companies with similar fundamentals (growth, margins, and operating characteristics) where valuations above 30 to 40 times are common. The company is still attractively valued when considering its strong historical track record, the solid outlook for future growth and its stable recurring revenue business model.

We see an excellent investment opportunity in Ebix over the next 1 to 3 years and we are reiterating our Focus BUY recommendation.

This month’s second update is in reference to Sylogist Ltd. (SYX:TSX) which we just re-iterated our buy rating in our September addition of this column with the stock at $8.64. Earlier this month, the company reported a solid acquisition and this week the company raised its dividend and reported positive financial guidance for 2018.

Sylogist Ltd. (SYX:TSX)

Industry: Technology - Software

Current Price: $9.90

Market Cap: $223,201,380

Shares Outstanding: 22,545,594

Fully Diluted: 24,525,611

Dividend Yield: 3.2%

Company Summary

Sylogist is a software company which, through strategic acquisitions, investments and operations management, provides intellectual property solutions to a wide range of Public Sector customers.  The company publishes mission-critical software products that satisfy the unique and sophisticated functionality requirements of Public Sector entities, non-profit organizations, educational institutions, government agencies as well as public compliance driven and funded businesses.  Sylogist’s comprehensive suite of software solutions to manage their financial, human resources and operational requirements. Solutions are delivered as customer installed or cloud based Software-as-a-Service (SaaS).


On October 23, 2017, announced that its subsidiary, Serenic So ware Inc., has acquired the assets of K12 Enterprise (K12E) and Sunpac Systems (Sunpac), both providers of ERP (Enterprise Resource Planning) solutions to the kindergarten to grade 12 local education authorities marketplace in the United States.

With a price tag of CAD $4.4 million plus the assumption of certain liabilities, principally deferred revenue (no details on the amount provided) and the K12E and Sunpac assets generating CAD $2.0 million of adjusted EBITDA over the past 12 months, Sylogist paid roughly 2.2 times EBITDA. This appears to be a very attractive price. Most cash producing SaaS businesses are purchased for 8 times EBITDA or greater. Sylogist will spend roughly CAD $500,000 in fiscal 2018 to integrate the acquired IP into the Navigator ERP platform and VisionPay application and will look to grow the business long term.

Dividend Increase

On November 21, 2017, Sylogist announced a 14% increase to its quarterly dividend, from $0.07 to $0.08 per common share, effective December 2017.  Further, the company reported a special dividend of $0.05 per common share. Both the quarterly dividend and the special dividend are payable on December 12, 2017 to shareholders of record on November 30, 2017 and are treated as eligible dividends pursuant to the Income Tax Act (Canada). This will result in a combined total dividend declared payable on December 12, 2017 of $0.13 per common share.

We are pleased with the increase going forward and the special dividend is an extra bonus. Perhaps most importantly the outlook appears to

2018 Initial Outlook

Management has reported that in fiscal 2018 (commenced October 1, 2017), the company expects annual revenues to be between $36 million and $38 million before the effect of future acquisitions or material new contracts. At the mid-range of this guidance the company should return to at least 10% revenue growth, the majority produced from the acquisition detailed above. The potential still remains for organic growth.

Adjusted EBITDA is expected to be in the range of $0.80 and $0.85 per common share. Given the fact the company’s trailing (last 12-months) adjusted EBITDA per share is in the range of $0.61, this is a significant increase in the magnitude of 35%. The company’s increased quarterly dividend of $0.08 per common share is based upon a payout ratio of approximately 40% of management’s low-end Adjusted EBITDA estimate for fiscal 2018.  The estimated revenue and Adjusted EBITDA range is based on a Canadian dollar to US dollar exchange rate of $0.80 US.


We viewed 2017 as a transitional year that as investors, we entered with caution. The company posted roughly $8 million in Q4 2016 and has posted sequentially stronger revenues in 2017 from $7.84 million in Q1 to $8.13 million in Q2 and to $8.92 million in Q3, with an improving bottom line. We believe the company is on pace to return to revenue growth in Q4 which should also be accompanied by growth in the bottom line, year-over-year. The caveat here is the exchange rate which could throw a curve-ball into the numbers, but the situation is improving. Long term, we do not see this as a significant issue.

In terms of valuations a below market equivalent multiple of 15 times the mid-range of management’s expected adjusted EBITDA in 2018 would produce a fair value in the range of $13.50 (comprised of 15*$0.825 + $1.15 in cash) or 37% higher than the current range. e stock also pays a $0.08 quarterly dividend for a yield of 3.3%, which we see as sustainable.

We are maintaining our rating on Sylogist at SPEC BUY, recently upgraded from HOLD and maintain the company’s position in our Focus BUY portfolio.  The shares are relatively illiquid and we recommend investors use limit orders in the $9.50-$9.90 range. Be patient and positions should be filled over the next 1-2 months.

Finally, we update and close out our position in Almost family Inc. (AFAM:NASDAQ), a stock we recommended to clients in March of 2016 at US$36.91 and in this column in June of 2016 with the stock in the US$40.00 range.

Almost Family Inc. (AFAM:NASDAQ)

Client Recommendation Price (March 2016): US$36.91

Current Price: US$61.35

Near Term: SELL

Long Term: SELL

Almost Family, Inc. (NASDAQ:AFAM), founded in 1976, is a leading provider of home health nursing, rehabilitation and personal care services. Almost Family, Inc. and its subsidiaries operate two segments: Visiting Nurse, or VN, which provides skilled nursing and physical, occupational and speech therapy services primarily to Medicare bene ciaries; and Personal Care, or PC, which provides custodial and per- sonal care services. Almost Family’s services are generally covered by federal and state government programs, commercial insurance and private pay. In addition to home health, Almost Family also created HealthCare Innovations (HCI) segment in February 2015 for the purpose of improving patient experiences and quality out- comes, while lowering costs, and responding e ectively to changes within the indus- try.


On November 16th, Almost Family and LHC Group announced a merger of equals to create leading national provider of in-home healthcare services.


We have elected to issue a SELL recommendation on Almost Family and secure a 67% investment gain in 20 months.

The financial characteristics of the combined entity appear strong but we don’t view the valuation as particularly attractive. Almost Family’s valuation multiple has increased significantly since our initial recommend in March 2016. is has been great for shareholders but increases risk as we look forward. We also have to account for the highly political nature of the healthcare sector in the U.S. with budget decisions and political commentary having substantial sway over investor sentiment.

The merger announcement has provided a great opportunity to take profits.

Disclosures: KeyStone holds shares in Sylogist. KeyStone employees hold shares in Sylogist and Ebix.

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