Computer Modeling Group - $CMG.to
Price (CAD): $5.51
Shares Outstanding: 80.2 mil (80.3 mil fully diluted)
Market Cap: 443 mil
Enterprise Value: 397 mil
Insider Ownership: 2-3%
In the past, I went over how I monitor oil and gas activity in the various geographies. Here is International, US and Canada. At the end of the post on Canada I mentioned that I would be looking at a basket approach to get exposure to the space as activity returns. Some of the companies I am monitoring have rallied faster than I would have thought and left me a little underexposed to my target. I put CMG in the basket. Full disclosure, I took my position a week before the latest earnings release at under $5.
I have followed $CMG fairly closely for over a year now. I heard about it during the last bull market that ended in 2015. At the time it was trading at over 12x rev which is really pretty crazy to me. Since then the valuation has contracted and revenue has dropped with the lower oil and gas activity leading to a share price going from $15 to around $5 today.
Background
Computer Modelling Group Ltd., a computer software technology company, develops and licenses reservoir simulation software in Canada and internationally. The company offers CMOST-AI, an intelligent optimization and analysis tool that offers solution for reservoir by combining statistical analysis, machine learning, and non-biased data interpretation; IMEX, a black oil simulator that is used to model primary and secondary oil recovery processes in conventional and unconventional oil and gas reservoirs; GEM, an equation-of-state reservoir simulator for compositional, chemical, and unconventional reservoir modelling; STARS, a thermal and processes reservoir simulator for the modelling of steam, solvents, air, and chemical recovery processes; and CoFlow, a reservoir and production system modelling software that allows reservoir and production engineers to make informed decisions on large integrated oil and gas projects. It also provides Builder, a pre-processor that simplifies the creation of simulation models by providing a framework for data integration and workflow management between various data sources; Results, a post-processor that helps in enhancing understanding and insight into recovery processes and reservoir performance; WinProp, a fluid property characterization tool; and Autotune artificial intelligence solutions that tune the model for optimal run time. In addition, the company provides professional services comprising specialized support, consulting, training, and contract research services. Computer Modelling Group Ltd. was founded in 1978 and is headquartered in Calgary, Canada.
The Corporation has found that the majority of its clients who have acquired perpetual software licenses subsequently purchase maintenance licenses to ensure they have access to current versions of the Corporation’s software. Annuity/maintenance license fees have historically had a high renewal rate and, accordingly, provide a reliable revenue stream while perpetual license sales are more variable and unpredictable in nature as the purchase decision and timing fluctuate with the clients’ needs and budgets.
Here is a quick look at the revenue split.
As the easy to extract oil reserves continue to deplete, the company's products should continue to have a tailwind as it more important than ever to optimize the capital of producers.
I have been on the wrong side of things when my specific company does not participate in a bull market in their sector. Since this is a top down bet on a return in activity, I need to make sure the business participates in increased activity levels. A quick look at the historical income statement shows that it follows the activity levels in sector.
Despite being headquartered here in Canada, the company has a global presence with over 600 customers in 60 countries. This means that CMG should participate in global activity, not just one specific region.
Given that it's a software company, the amount of tangible assets is low and when times are good the ROE is quite high. I removed leases from the calculation to get a better historical comparison.
Share Structure & Ownership
There are about 80 mil shares outstanding with little dilutive instruments. The shares are largely held by institutions. Two large funds (Burgundy and Edgepoint) own about 40% of the outstanding. Burgundy has lightened up their position a bit, if that continues that could put downward pressure on the stock.
Management doesn't own a ton of shares. The former CEO owns about 2% of the shares at this point. The current CEO owns around 2x salary in shares and about 70-75% of his prior total annual compensation. The board owns 0.4% of the shares.
Risks
There is a shareholder rights plan that expires in 2024.
One of the funds could decide to sell putting downward pressure.
O&G activity may stall out.
The company may not participate in the rebound in activity.
The business may see increased profits, but the valuation may continue to compress.
Valuation
Summary
I think that CMG is an interesting addition to the O&G basket. The company pays a dividend and currently yields over 3.5%. They cut the dividend during covid as profits have declined, so they may increase it as activity returns.
Their is also continual excitement that some Constellation Software employees are on the board. Recently the chair has announced his retirement and Mark Miller (COO of Constellation Software) has been announced as his replacement. I see the likelihood of CMG being acquired by CSU as low.
Anyone else own CMG?
Thanks,
Dean
*long $CMG.to at time of writing.