Canadian Cybersecurity Firms Big Winners in Yesterday’s Federal Budget

Benjamin A. Smith
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Government Places a $507 Million Floor On Canadian Cybersecurity Investment For The Half Decade

For all the Trudeau government’s perceived deficiencies regarding its handling of the Canadian economy, it has come through large on Canadian cybersecurity investment. Yesterday, Finance Minister Bill Morneau confirmed leaked reports that Canada was indeed going to invest heavily in the sector—to the tune of $507 million over the next five years. The move aims to revamp the already-antiquated ‘Harper’ strategy, which dates back to 2010.

As outlined in the House Of Commons, the government’s new strategy takes a multi-pronged approach. The focus isn’t just on upgrading the resilience and robustness of existing computer systems. There’s also heavy emphasis on incubating the next generation of Canadian cybersecurity units, as evidenced by a $116 million investment in a soon-to-be RCMP division focused directly on cybersecurity crime.

The Communications Security Establishment (CSE), a highly-secretive National Defense organization (the digital version of CSIS) also wins big here. CSE is poised to obtain $155.2 million over five years—$44.5 million per year thereafter—to create the Canadian Centre for Cyber Security. An important mandate of this division will be to coalesce government’s operational cyber expertise into one place. Canadian cybersecurity firms which do business with the Federal government shouldn’t have any shortage of work.

Additionally, the Liberals have further committed $236 million to yet-to-be-announced initiatives. There’s more spending coming down the pike than was originally rolled out.

The government’s mega-investment also presages the passage of Bill C-59, currently working its way through the Senate. Although it doesn’t receive much mention in the press, Bill C-59 proposes the most extensive changes to Canada’s national security laws in the last three decades. Not only does it create three new Acts, but it changes five other existing Acts—including the Criminal Code. The fact that most Canadians are not aware of the coming sweeping changes to the code could be considered worrisome; but that’s beyond the scope of this article.

What we can quantify is that our government is betting big on Canadian cybersecurity, and this should be a big boon to the sector.

Here are some stocks uniquely positioned to capitalize on the upcoming CAPEX windfall.

 

BlackBerry Limited (TSE:BB)

You would be surprised how many Canadians still believe BlackBerry is about mobile devices. At Blackberry’s apex between 2010-2012, about 80% of net revenues were derived from devices. It was only after their business model fell apart that Blackberry Transitioned into a software solutions provider. Although the switch from mobile communications to enterprise software didn’t come without considerable hardship, Blackberry is emerging on the other side.

As we can see from the chart below, the company is just stating to become profitable again. A big reason: BlackBerry is becoming one of Canada’s foremost cybersecurity providers.

BlackBerry provides a full suite of cybersecurity products. Everything from consulting, forensics services, IT security training and endpoint solutions. They have existing contracts with the U.S. Department of Defense, and this experience should give them a decided advantage in procuring cyber-contracts back home.

While the company has different divisions, cybersecurity is primed to become the main profit center. This includes the hot, developing sector of self-driving vehicles, where Blackberry has just launched cybersecurity software to thwart hackers.

With a market cap north of $8 billion CDN, BlackBerry is a quite removed from our niche as small cap analysts. But it’s certainly one looking into—especially as a defensive non-cyclical portfolio holding should the economy submerge into recession (or low growth periods).

As we’ve elucidated before, the cybersecurity sector stands alongside utilities and consumer staples as flights to safety during business downturns. Companies simply cannot afford to skimp out of protecting their data. The damage brought about by security breaches is too risky for most companies to gamble with, as Equifax found out last year.

Overweight cybersecurity stocks near the end of business cycles, underweight them once they start maturing (better growth opportunities elsewhere).

 

Hilltop CyberSecurity (CSE:CYBX)

Hilltop Cybersecurity owns a military-grade, patented, cybersecurity platform called Vauban. The application uses a proprietary biometric security solution for crypto-currency cold storage, wallets and transactions. All of those areas are likely on the Canadian government’s “to-do” list in the coming years.

With blockchain technology poised to become inextricably linked to governmental systems, Hilltop Cybersecurity is an interesting play. While the company’s main focus is on the private sector, they have done business with the Government before. Key contacts are an important, often overlooked ingredient to the product cycle.

Hilltop CyberSecurity is a speculative play, and not one I’ve looked at in-depth> Nevertheless, it’s a stock worth tracking. Watch for future updates as their business case warrants.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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