Buy Converge Technology Solutions for a double, Paradigm Capital says

Paradigm Capital analyst Kevin Krishnaratne likes the new acquisition by hybrid IT solutions provider Converge Technology Solutions (Converge Technology Solutions News, Stock Quote, Chart TSXV:CTS), which picked up Portland, Oregon-based Nordisk Systems, as it brings a mix of hardware, software and managed services and adds to the company’s Northwest US footprint.

In an update to clients on Thursday, Krishnaratne reiterated his “Buy” rating and $1.75 target price on the stock.

Yesterday, Converge announced the acquisition of Nordisk Systems, saying it will pay US$2.5 million up front, with another US$2.0 million due on September 30 and with a promissory note in the amount of US$2.0 million. As well, up to US$3.0 million in earnouts will be considered over the next three years, contingent on certain milestones.

“We view the deal as attractive given the full earn-out purchase price works out to ~3.9x EBITDA versus the stock, which is currently trading at ~5.0x 2020e EBITDA,” writes Krishnaratne. “Beyond the valuation, we like the deal as it gives Converge presence in the Northwest US, helping fill a gap in the company’s footprint. Additionally, the IBM focus should help position Converge to benefit from IBM’s push to accelerate its own cloud services business.”

The analyst says the deal is slightly accretive, moving CTS’ 2020 NAV estimate from $1.68 per share to $1.78 per share. Krishnaratne has updated his forecast to include six months of contribution from Nordisk to CTS’ fiscal 2019 and is now calling for fiscal 2019 revenue of $674.7 million (previously $661.7 million) and adjusted EBITDA of $29.8 million (previously $29.0 million).

Krishnaratne’s $1.75 target represents a projected 12-month return of 116.0 per cent at the time of publication.

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