On Wednesday, May 12, Softchoice filed its preliminary prospectus as it seeks to list on the TSX Index. The company is currently independently owned by Birch Hill Equity Partners which is expected to remain controlled by Birch Hill.
Details of the financing were not included in the prospectus so we'll report back once we have those details.
Softchoice is a leading IT solutions provider and designs, procures, implements and manage complex multi-vendor IT environments. As at March 31, 2021, Softchoice had more than 1,850 team members with a physical presence across 26 markets in the U.S. and Canada.
The company operates in a large and fragmented market worth $298B in NA alone. The market is also expected to grow at a CAGR of 8%. The company provides multi-cloud solutions, deploys and manages IT solutions and provides software asset management.
The company expects to deliver double-digit profit growth through enhancing existing customer services, and new customer acquisition.
Softchoice recently launched (September 2020) its Project Monarch which enables scalable end-to-end business process support. It has been investing in the project since 2018 and by 2022 is expected to add $25M of annual EBITDA.
While growth prospects seem attractive, this isn't going to be a hyper growth tech company.
Recognizing that the pandemic impacted IT service companies, let's leave 2020 performance aside. Between 2017 and 2019, the company averaged a 10% average CAGR in gross sales,
Worth noting, that drops to a CAGR of only 4.43% in terms of net sales. Which is arguably, the most important.
Softchoice is also seeing impressive FCF and adjusted EBITA growth (north of 20%) which will enable to company to re-invest and continue growing the company at a healthy clip.
In terms of competition, there are plenty to consider. The company has many smaller competitors across its various business lines but estimates that there are only 5 that truly provide the breadth of services offered by Softchoice. Unfortunately, it does not list those five.
Two companies that immediately come to mind in terms of comparable TSX-listed companies include CGI Group and Converge Technology Solutions (TSX:CTS). These are by far the two largest publicly-traded companies in the industry. A case can also be made for Quisitive (TSXV:QUIS) but it is much smaller in size. Once pricing is made public, we'll see how they stack up against those two leading IT service providers.
We do like IT service companies - they may not be as flashy as some of the higher growth SaaS companies, but they are usually more profitable and provide consistent returns. The only real point of concern, is that net sales arent' growing nearly as fast as gross sales, a sign that it is likely having to offer more discounts to win/keep customers. While not unique to Softchoice, certainly a trend worth monitoring.
The IPO is worth monitoring, but we will have to wait and see how this prices and the subsequent valuation in relation to some of the comparables mentioned above.