Better than expected second quarter results have Paradigm Capital analyst Daniel Rosenberg raising his price target on Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News TSXV:CTS).
In a research update to clients Tuesday, Rosenberg maintained his “Buy” rating and raised his one-year price target on CTS from $2.50 to $3.00, a figure that implied a return of 87.5 per cent at the time of publication.
The analyst argued that Converge is in the midst of an upswing.
“Q2 revenue of $227.8M (our est. $223.3M; Street $220.2M) and adjusted EBITDA of $11.7M (our est. $10.2M; Street $9.4M) were nicely ahead of expectations,” Rosenberg said. “Revenue for Q2 was up 44% y/y, and gross margin increased to 24.1% versus 22.9% the prior year. The strong results are expected to continue into the latter half of the year, owing to continued digitization efforts, and seasonal strength in Q4. Revenue from recurring cloud, software and managed services was reported as $205M, a significant uptick from the previous $190M in annualized recurring revenue booked in the prior quarter (+8% q/q). Given the typical 3-year duration of its service agreements, this ARR provides strong visibility for revenue into 2021 and is supportive of continued margin expansion.”
Rosenberg thinks CTS will post Adjusted EBITDA of $49.3-million on revenue of $1.0-billion in fiscal 2020. He expects those numbers will improve to EBITDA of $57.6-million on a topline of $1.06-billion the following year.
“We value CTS using a 7.5x 2021e EBITDA multiple, resulting in our new $3.00 target (was $2.50. Peers are trading at 10.1x with pure-play managed services providers trading at 18.8x,” the analyst added. “Our target multiple accounts for the large M&A opportunity for Converge and is supported by recent transactions in the space. Its long-term M&A strategy and disciplined approach to capital allocation are supportive of long-term value generation. Thus, we see a compelling entry point into the name. We reiterate our Buy recommendation.”
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