TOP IDEAS: Sangoma Technologies' (TSXV: STC) transformation is ready to reignite revenues and profits from sales of new products.

The past few years buying shares of Sangoma Technologies Corporation (TSXV: STC - $0.21) have proven to be a value trap for small cap investors. But in 2014, stock of Sangoma may prove to be a prudent small cap value buy.

In 2012, Sangoma Technologies needed a makeover. Sales for the Company’s legacy products used in PC-based Voice over Internet Protocol (VoIP) telephony systems for Public Switched Telephone Network (PSTN) connectivity were on the decline and, so too, the Company’s financial performance and stock price.

Fast forward two years: The stock price is at a low but, after a focused R&D program, Sangoma Technologies has completed the transformation of its product portfolio of hardware and software components that enable or enhance Internet Protocol (IP) Communications Systems for both telecommunications and data communications applications. This transformation should begin to pay off for shareholders of Sangoma Technologies with improved financials and a higher stock price.

With more devices, networks, clouds and systems needing to interoperate, the VoIP communications landscape continues to grow in complexity. Sangoma Technologies' new portfolio of products enables Service Providers, Carriers, Enterprises, Small Medium Businesses, Original Equipment Manufacturers (OEMs) to leverage their existing infrastructure with the most advanced applications and services from the latest telecom and datacom technologies available to maximize their financial returns.

The Company’s latest product innovations include Session Border Controllers, a suite of Microsoft Lync compatible products, VoIP Gateways, Call Tapping, Call Center Software, to name a few, each having specific applications and solutions for a worldwide customer base. Significant to note is that today, nearly 50% (and growing) of the Company’s revenues are coming from new products developed and introduced over the last one to two years to counter the decline in sales from the Company’s legacy products.

With the current product mix, gross margins on the sales at the Company average a healthy 67%. Coupled with a cost restructuring completed at the end of 2013 (which seeks to maintain the momentum of new product sales while reducing selected operating costs), the profitability picture becomes much clearer for the coming quarters for Sangoma.

Last fiscal year, sales at Sangoma totaled $12.95 million and the Company lost a little money (excluding one-time charges). In Q1 for fiscal 2014 (traditionally a slow quarter), Sangoma was cash-flow positive. With that historical information in mind, a modest 10% increase in sales year over year (driven by new products introduced),would position the Company to return a good profit. If sales rise quicker from the economic recovery, then Sangoma can earn bigger profits.

We believe that Sangoma sales will be higher in 2014 and therefore today we see value in the Company’s stock price for small cap investors. Trading at $0.21, the Company’s stock multiple is a very inexpensive 3.5 times Enterprise Value (EV) to EBITDA, based on fiscal 2013 results. With modestly higher sales levels anticipated and the full effect of lower costs as a result of the restructuring, Sangoma should be positioned to earn $1.2 million of EBITDA over the next four quarters. Based on this premise we recommend the shares of Sangoma Technologies should be accumulated to a price of $0.40 which is equal to 6 times EV/EBITDA looking forward 12 months. If Sangoma’s sales growth momentum builds beyond 2014 then the Company’s current stock price and our accumulation target of $0.40 will prove to be extremely cheap.

Another positive for small cap investors is the strength of this Company’s balance sheet. Sangoma Technologies is comfortably liquid with working capital of $10.4 million, of which $4.33 million is held in cash. The Company is also debt-free.

Sangoma Technologies has 28.8 million shares outstanding, 709,000 less shares outstanding than at the beginning of fiscal 2013. The Company bought back some of its own shares last year.

The largest shareholder is the Company’s Chairman of Board, controlling about 18.5% of Sangoma’s outstanding shares.

Sangoma Technologies website: www.sangoma.com

Author Ownership Disclosure: TSXV: STC - Yes

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This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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The author of this article has acquired and may trade shares of Sangoma Technologies Corporation through open market transactions and for investment purposes only.