Versant Partners on MKS Q2

If you are looking for a Canadian software story with growing earnings and a 6% plus dividend yield (which was just increased by the company), here’s a summary research note on Wellington Financial Fund I portfolio co. MKS Inc., published by Versant Partners yesterday:

EVENT

MKS released Q2/F10 results (October quarter) yesterday.

BOTTOM LINE

While the enterprise software market continues to face headwinds, MKS is making significant progress with a number of large customers. As such we expect license revenue to be more robust in the second half. Meanwhile, profitability metrics continue to be impressive even on lower license revenue. The stock is well supported by a 6%
dividend yield, a stock-buyback and an attractive valuation. We maintain our $11.00 one-year target and Buy recommendation.

FOCUS POINTS

Revenue was $14.7 million, slightly lower than our $14.8 million forecast. Licence revenue of $3.9 million was significantly
lower than our forecast of $5.1 million, but this was offset by robust maintenance and services revenue.

Profitability beat expectations with EBITDA margins of 17%, ahead of our forecast of 16%. Adjusted EPS was also ahead of expectations, US$0.16 vs. our estimate of US$0.15.

The board increased the quarterly dividend to US$0.15/share (or US$0.60/share annually) from US$0.125/share (or US$0.50/share
annually).

Our target of C$11.00 is based on 8x EV/F2010 (ending April 2010) EBITDA. This equates to 15x F2010 earnings.

For those of you with acute memories, MKS is a holding in our Decade of Daddy Mirror Fund (see prior post “Decade of Daddy Mirror Fund™ Quarterly Report” October 6-09).

MRM
(disclosure – I own MKS)