Monday, August 8, 2011

Computer Modelling Group ( Toronto - CMG ) -- Order Rate Improving

Stock price reflects 2-for-1 split.

Computer Modelling Group (CMG $10.75) appears on track to report excellent on target Q1 (June) results.  Orders for the company's energy development simulators remain vibrant, despite the recent decline in oil prices.  Project activity hasn't diminished in Canada.  And the company is continuing to make competitive inroads in other geographies.  Computer Modelling is the leading provider of reservoir simulation software for heavy oil, oil sand, and other challenging targets.  New discoveries are becoming increasingly more difficult to recover, boosting interest in the company's technology.  Financial results might be less dynamic than Computer Modelling's unit volume gains due to currency factors.  Most of the company's personnel (costs) are in Canada, while more than 70% of sales are priced in U.S. Dollars.  The Canadian currency has been relatively stronger this year, creating a negative translation effect.    Even so, pretax margins are likely to remain in the 45%-50% vicinity.

The DRMS software will enter beta testing in Q4.  That technology simulates the above ground operations at energy projects, allowing customers to maximize all aspects of the work, not just extracting the oil.  Petrobas and Shell are footing the bill for the development work and will get first shot at the software.  But Computer Modelling will retain all rights to the software and will be able to market it to anyone once it is commercialized in 2012.  Final work is focusing on integrating the simulators with customer databases and other computer resources, simplifying the user interfaces so engineers can use the technology without extensive training, and speeding up the processing speed even more.  In laboratory testing the new programs already run faster than the company's existing products.

Results will be affected by mix between perpetual and annual licenses.  Perpetual buyers spend more up front.  Annual deals generate higher recurring revenue.  Either way, the total number of licenses in force is poised to keep advancing.  Demand for oil is likely to remain robust at least for several more decades.  Computer Modelling is a key player in developing new reserves to meet that projected demand.  The new product line could amplify results further.  The shares remain a solid investment. 

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