With different characteristics compared to growth investing, income investors must be prepared to deal with adverse scenarios including reduced dividend payment, return of capital, and possible capital losses. A decreased dividend payment is still digestible if it is temporary or a small cut. How will income investors react if a company were to slash its dividend by more than 90% to ‘self-fund’ growth? 

This is precisely the case at Sylogist. A company characterized for its strong cash flow profile, high recurring revenue, acquisitions, and high dividend yield (more than 8.5% on Oct 31, 2022) slashed dividends from $0.125 per share per quarter to $0.01 per share per quarter. Of course, this has not been the most favored news. However, we would like to see what the management is up to. This Calgary-based software company was founded in 1993 and runs a profitable business generating significant free cash flow. Over the years, there have been issues related to poor corporate governance, a stagnant business model, and a misalignment between the management team and shareholders. The updated management and refreshed board over the past few years have improved the overall governance and business strategy. This transformation has been orchestrated as a stepping stone in rejuvenating the inert business.

The reboot of capital deployment strategy and M&A pipeline has already been highly accretive. Top-line revenues have grown at a compounded annual growth rate of 10.3% over the past five years.

SYZ delivered organic growth in 2022 for the first time in many years. This was driven by capital investments in sales and marketing, brand rework, and innovation. Organic growth is expected to climb to low single-digit (from low single negative) for 2023. Additionally, SYZ’s M&A pipeline remains strong and with added liquidity (from reduced dividends) to pursue opportunities. The breadth of potential transactions extends from the acquisition of intellectual property rights to customer acquisition.

Source: SYZ Investor Presentation 4Q22

Nearly $11 million per annum is freed up by reducing the dividend. In the recent earnings call, management noted a new brand strategy across all three verticals, namely, SylogistGov, SylogistEd, and SylogistMission, which will simplify messaging, increase marketing return on investment, and drive brand awareness. The company is also investing in the roll-out of its new, 100% SaaS municipal government & citizen engagement SylogistGov solution, with implementation at several early-adopter municipalities and a full-scale launch expected in the second quarter of 2023. Historically, investors shied away from SYZ over the past few years given low growth, compensation issues, and one-off charges for the company. The CEO, Mr. William Wood, who joined two years ago, has shifted the company’s focus and growth trajectory. We believe solid execution of strategic capital deployment between 2022 and 2023 has the potential to re-rate company valuations higher. 

The busy M&A pipeline, contract wins, and solid backlog serves as an indication that Sylogist is progressing towards its goal of becoming a company seeking to capitalize on growth opportunities, both organically and inorganically. Trading at 7.7x forward EBITDA and 30.6x forward earnings, shares are trading at a steep discount compared to its SaaS peers, and given the capital deployment trajectory and focus on growth, we think there is lots to look forward to here.

All the best!

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in securities mentioned.