On the Road, COVID-style: Staycation Style
For this edition of “On the Road”, we delve once again into Pembroke’s archive of past travels and pay homage to the “staycation”. As COVID-19 has severely limited the vacation plans of travelers, the staycation has emerged as a popular substitute and serves as a reminder that many great things lie close to home. We take this opportunity to highlight the discovery process of a holding in our Canadian and dividend mandates that we found close to home: Tecsys.
Tecsys is a provider of supply chain solutions to the healthcare, distribution, and retail industries. The company helps organizations improve visibility into all aspects of their supply chains, enabling cost savings, enhancing customer service, and uncovering optimization opportunities. The Tecsys offering is comprised of a software platform, consulting and implementation services, and third-party hardware. Software subscription and maintenance revenues provide Tecsys with recurring, low-churn cash flow streams.
Our first “road trip” to visit Tecsys’ headquarters took place in December 2012. While our investment team has traversed North America and international destinations to conduct on-site due diligence, our journey from our Montréal offices to Tecsys’ headquarters spanned a mere 1.8 kilometres. We made the 17–city block trip by metro in just over 10 minutes – by far the shortest journey we have profiled in our “On the Road” missives.
At the time of our visit, Tecsys was a $40m market capitalization stock with limited institutional investor sponsorship. We were convinced by a sell-side analyst who had a keen interest in emerging microcap stories that it would be worth our time to pay Tecsys a visit, despite its size and illiquidity. We went into the meeting with an open mind, but with no expectations that the company would become an investment in Pembroke’s portfolios. Our site visit and conversation with CEO Peter Brereton and then CFO Berty Ho-Wo-Cheong, however, left an indelible impression upon us, with key takeaways as follows:
- We saw first–hand the teams of software engineers, consultants, sales staff, and back–office personnel that comprised the company’s headcount of approximately 300 at the time. It was clear to us that this was a sophisticated, professionally managed operation despite the company’s obscure public market profile.
- The caliber and extent of the organizations on Tecsys’ customer list in the healthcare and distribution verticals lent great credibility to the company’s solutions.
- The endorsement of Tecsys as a “visionary” company by Gartner, a well–respected technology research and advisory firm, gave us confidence about Tecsys’ competitive position in the supply chain management industry.
- Directors and officers of Tecsys as a group owned over a third of the company and were thus well-aligned with other investors.
- Despite its small size at the time, the company was profitable and generated free cash flow. Management had a proven record of thoughtful capital allocation, balancing organic growth, share buybacks, and dividend payments in a disciplined manner.
- Management showed a propensity to strategize for the long-term. The company’s decision to migrate two million lines of code to Java from a legacy programming language highlighted this mindset, as this was a significant endeavour in terms of cost and time. Making the transition, however, was absolutely necessary to modernize the company’s technology platform and enable future scalable growth.
- The company enjoyed a significant runway for growth. In particular, the hospital market seemed ripe for share gains, as incumbents competed with antiquated technology and Tecsys had traction with impressive reference customers.
We made the short return trip to Pembroke’s offices and prioritized the Tecsys file for follow-up research given the encouraging and bullish nature of our visit. By early January 2013 we had completed our due diligence, and we made our first purchase of Tecsys shares for our dividend portfolios.
The intervening years since our initial visit have been incredibly dynamic ones for Tecsys. Sales and profits have grown substantially, three acquisitions have been closed, a transformative shift towards a software-as-a-service model is underway, and the company’s competitive position has only strengthened. Tecsys’ shares have reflected the company’s underlying fundamental success. Despite the market correction in 2021 of some information technology stocks following a strong performance in 2020, we remain enthusiastic about Tecsys’ prospects, and as such maintain significant ownership positions across our Canadian growth and dividend mandates.
A very short initial journey has yielded a long, fruitful investment in Tecsys. While we take great pride in going the extra mile to research companies for our clients, our experience with Tecsys reminds us of the tremendous opportunities that can be found close to home. We look forward to resuming our travels, near and afar, in a post-pandemic world, and sharing our accounts of them in future issues of Perspectives.
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This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.