Converge Technology Solutions gets price target raise at Echelon

Echelon Capital Markets analyst Rob Goff is staying bullish on IT services company Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News TSXV:CTS) following the company’s most recent acquisition.

In an update to clients on Friday, Goff maintained his “Speculative Buy” rating while lifting his target price from $3.00 to $3.30, while elevating CTS to “Top Pick” status for the fourth quarter 2020.

Toronto-based hybrid IT Solutions provider Converge on Thursday announced announced the acquisition of Texas-based Unique Digital, a company that generated $70 million in revenue over the trailing 12 months.

The deal is said to involve US$5.35 million in cash, US$2.4 million in promissory notes and earnout payments of up to US$1.5 million in aggregate, payable over three years.

Converge said it plans to introduce its Software Enabled Hybrid IT solutions to Unique Digital’s customers and to leverage for Converge clients Unique’s strengths in cloud architecture, networking, storage, high availability and data protection solutions related to mission critical environments.

On Converge’s 13th acquisition since late 2017, CEO Shaun Maine wrote in a press release, “Like the PCD Solutions acquisition earlier this year in Canada, Unique Digital brings deep VMware capabilities to Converge's US operations. With Texas containing four of the top-ten-largest US cities (Houston, Dallas, Austin, and San Antonio), we expect Unique Digital's strategic alignment with Dell Technologies as a Titanium partner and highly trained technical staff to be critical assets in becoming a dominant software-enabled Hybrid IT provider in the Texas marketplace.”

Regarding the deal, Goff said it’s right out of Converge’s playbook as the company looks for representation in all of the NFL Football cities and is the company’s first in Texas. “Converge’s track record of successfully completing 13 accretive acquisitions since October 2017 speaks to the existing market opportunities and management’s capabilities,” he added.

“We see many companies with profiles like Unique Digital where they are challenged to properly service client demands for cloud services and where they lack the scale to realize full vendor savings. We believe the Company stands to build further shareholder value given the positive momentum of cross-selling its product suite for organic growth while key vendor relationships bring efficiencies, referrals, and acquisition candidates. We are bullish towards the Company’s ability to maintain its acquisition and organic growth momentum,” Goff said.

Goff noted CTS’ recent close on an upsized equity underwriting at $34.5 million, which he sees as going towards more aggressive movements to further its M&A playbook. On the IT Services space, the analyst pointed to secular story in technology adoption and said that private equity interest in IT Services, which has peaked over the last 12 months, is recognizing the potential for organic and acquisition growth in the fragmented market.

For Converge, Goff is expecting fiscal 2020 revenue and adjusted EBITDA of $1.021 billion and $54.9 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $1.426 billion and $87.1 million, respectively.

At press time, Goff’s new $3.30 target represented a projected 12-month return of 53.5 per cent.

The analyst said CTS’s valuation stacks up well against its peers.

“The Company’s shares are valued at 7.2x/4.5x 2020/21 EV/EBITDA against US IT Solution Provider peers averaging 11.6x/10.7x, Canadian peers at 11.8x/12.5x, and European peers at 15.8x/14.6x. Our $3.30 PT reflects 10.0x/6.3x 2021/22 EV/EBITDA,” Goff noted. “We find underlying support in the Company’s FCF yield at 16.3%/30.3% against our 2020/21 FCF per share of $0.35/$0.66. We put FCF across 2020-2022 at $209M ($1.83/FD share) versus its current market and enterprise capitalization of $259.2M/$394M. Our FCF reflects free cash flow from operations after working capital.

Goff spoke briefly about Absolute Valuations.

“Our current/one-year target DCF valuations are at $3.44/$4.50 (discount rate – 16.5%, 2025 terminal EV/EBITDA at 6.0x represents 47.9% of our DCF). Moving our discount rate by 1.5% or our terminal
EV/EBITDA multiple by 1.5x moves our values by $0.23/$0.90. We see room for more generous valuations,” he argued.

Earlier this year, Converge Technology Solutions announced it received Ingram Micro Cloud’s 2020 Reseller of the Year Award for North America. The award was presented to Converge during Ingram Micro’s Cloud Summit: The Digital Sessions, which was online only this year due to COVID-19. The Ingram Micro Cloud operates in 64 countries with over 55,000 reseller partners.

“We congratulate Converge for winning this year’s Reseller of the Year award,” said Tim FitzGerald, Vice President of Channel Sales, Americas at Ingram Micro Cloud. “Together, we measure success by the revenue and growth of customers. Converge has consistently and significantly made a difference for numerous customers, and we look forward to helping them grow their cloud ecosystem.”

“This is a big moment for Converge,” said Converge President Greg Berard. “I’m so proud of all the work our team has done to earn this distinction from one of our significant strategic partners. This award is a testament to the success we had in 2019 with our clients around our multi-cloud strategy and an indicator that we will continue to work with Ingram Micro Cloud to create success and value for our customers.”

About Converge Technology Solutions (via company documents)

Converge Technology Solutions Corp. is a North American IT Solution Provider focused on delivering industry leading solutions and services. Converge’s regional sales and services organizations deliver advanced analytics, cloud, cybersecurity, and managed services offerings to clients across various industries. The Company supports these solutions with talent expertise and digital infrastructure offerings across all major IT vendors in the marketplace. This multi-faceted approach enables Converge to address the unique business and technology requirements for all clients in the public and private sectors. For more information, visit convergetp.com.