Converge Technology is a buy, says Paradigm Capital

In a coverage launch on Friday, Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart TSXV:CTS) merits a “Buy” rating and $1.75 target price from Paradigm Capital analyst Kevin Krishnaratne, who says the hybrid IT services company is hitting the right spot when it comes to IT spending trends.

“We see Converge as a compelling way for investors to capitalize on the hybrid cloud IT spending cycle which is still in its early days,” says Krishnaratne. “We believe the company is well on track to continue to successfully execute on its M&A strategy, as has already been demonstrated with its seven acquisitions.”

CTS, which was founded in November of 2016 and commenced trading on the Venture exchange on November 13, 2018, aims to consolidate the regional IT services market by acquiring four to six service providers per year. Its business is currently composed of 75 hardware sales, 15 per cent software and cloud services and ten per cent managed services.

Krishnaratne points out that North America’s IT market is worth $1.5 trillion and is growing in the mid-single-digit range, with software solutions growing at an eight per cent pace and public cloud services growing at a 20 per cent clip.

The analyst asserts that Converge has a strong management team with a wealth of experience in creating and managing value-added resellers and he sees Converge’s growth by acquisition plan as fitting in well with the current climate.

“We believe Converge is well aligned with where IT spending trends are moving, namely its strategy to offer its clients software, hybrid cloud, and managed services, which are higher growth and higher margin and help the company stand out versus traditional value-added resellers who focus more on hardware and compete on price,” he writes.

“In our view, Converge’s deep understanding of its clients increasingly complex IT networks that leverage multiple IT vendors and a mix of public and private cloud services should enable it to drive an increasing level of managed services revenue and drive profit upside,” says Krishnaratne.

The analyst is calling for fiscal 2019 revenue and Adjusted EBITDA of $735.7 million and $28.2 million, respectively, and fiscal 2020 revenue and Adjusted EBITDA of $799.5 million and $33.0 million, respectively. His $1.75 target represents a projected return of 127.3 per cent at the time of publication.