The TSX Venture Exchange is the epicenter of startup volatility. Most businesses with stocks listed on this exchange have never turned a profit, have unproven business models, and offer vague disclosures. This makes investing here risky and unpredictable.
However, investors who look carefully enough are likely to uncover the sort of under-priced, high-growth gems this exchange was designed to host. One of those gems is Calgary-based enterprise resource planning (ERP) solutions provider Sylogist (TSX: SYZ).
Sylogist offers a 3% dividend yield — the highest on the Venture Exchange. The underlying reason for this hefty dividend is Sylogist’s business model. The company creates and distributes software for fund accounting, grant management, and payroll systems. In other words, its software addresses some critical elements of every organization.
Another reason the company has healthy cash flows is the type of customers the management has decided to focus on. Sylogist customers are primarily government institutions and education boards spread across the world. The company’s software is used by over 1,000 customers worldwide — the majority of whom are in North America and the U.K.
Coupled with the fact that these software packages are high margin (around 33%) and have high switching costs, Sylogist has a base of stable and recurring income every year. These healthy cash flows are being paid out to shareholders in the form of dividends. In fact, the dividend has grown over the past eight years, with the most recent uptick raising the bar by 20%.
It’s rare to find a venture stock with such a track record of stable and expanding dividends. In fact, Sylogist is already eligible for inclusion on the S&P/TSX Canadian Dividend Aristocrats Index — a rare designation for any stock, never mind a startup.
Furthermore, the dividends are remarkably robust. The payout ratio is a modestly low 57%, while the amount of cash on the company’s book covers the annual dividend for the next four years. The company generates operating cash of nearly $12 million on sales of over $17.8 million.
Meanwhile, growth is fueled by an expanding customer base and a broadening portfolio of software services. As government agencies and education boards across the world adopt new technologies to drive workplace efficiency, Sylogist can expect more long-term clients to sign up over the next few years.
The ERP services market is fragmented and isn’t expecting much growth, but some estimates suggest the market could be worth as much as US$85.9 billion by 2022. With its market cap hovering around $283 million, Sylogist is still a niche player in this global sector, which makes it an ideal acquisition target for one of the big players.
Considering all these factors, the stock’s 23.4 price-to-earnings (P/E) ratio seems fair. At that valuation, shareholders are more than adequately compensated for the risks this business entails.
Bottom line
Sylogist is a small player in the global market for enterprise resource planning software, but it has an iron grip on its client base of government agencies and education boards, which could make it an ideal target for acquisition.
Meanwhile, the steady earnings and high dividend yield should keep investors well compensated.
