Look for Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News TSXV:CTS) to drive ahead with its deep pipeline of strategic, accretive acquisitions, says Echelon Capital Markets analyst Rob Goff, who delivered an update to clients on the company on Sunday. Goff has labelled Converge a Top Pick for the fourth quarter.
Vancouver-based Converge, a Hybrid IT solutions provider offering advanced analytics, cloud, cybersecurity and managed services to clients across a number of industries, announced on Friday the closing on a previously announced bought deal financing round and exercise of over-allotment of about 15.4 million shares at a price of $3.00 per share for gross proceeds for $46.2 million. The company said it will use the net proceeds for acquisitions, working capital and general corporate purposes.
Goff said Converge is likely to add both tuck-in acquisitions and modestly larger targets in North America before moving forward with its stated goal of acquiring in Europe, post Brexit. The analyst said he’s leaving his forecast as is for now, although he’s optimistic that M&A activity and related revenues will support positive revisions. Currently, the analyst is calling for 2020 revenue and adjusted EBITDA of $931.6 million and $7.7 million, respectively, and for 2021 revenue and adjusted EBITDA of $1.143 billion and $86.9 million, respectively.
So far in 2020, Converge’s share price is up 135 per cent, including a gain of over 90 per cent since reaching a low of around $1.70 in early September. With his report, Goff has reiterated his “Speculative Buy” rating but upped his target price from $4.00 to $4.60, which at press time represented a projected 12-month return of 39.4 per cent.
“Our price target move reflects the prospects of resumed momentum on the acquisition front where the Company’s ability to source and execute accretive deals has enabled it to achieve a scale where its cross-selling revenue generation, vendor advantages and platform efficiencies support continued accretive inorganic growth. Furthermore, with its debt costs now lowered to roughly 2.5-3.0 per cent from eight to nine per cent, with cash reserves of ~$102 million (including ~$81 million raised through two equity issues) and the Company’s legacy acquisitions on-pace to be fully integrated onto one platform entering the new year, it is in its strongest position to date as an acquirer,” Goff wrote.
On Converge’s growth prospects, Goff said the company has opportunity around continued migration to the cloud of legacy IBM I-series processor, saying this could “quickly emerge” as a significant organic growth driver where target run-rates exceed $30 million and thereby add about 2.5 per cent to organic growth.
On the inorganic front, Goff said the company’s track record of completing 13 accretive acquisitions since October 2017 speaks to the existing market opportunities as well as management’s capabilities.
“We see many companies with profiles like its latest acquisition, Unique Digital (Oct.1/20), 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 wrote.
“CTS looks to leverage its managed services proposition, as one of two North American IT service providers with I-Series migration capabilities, to enter the UK market where it can follow leads from its vendors Ingram, IBM/RedHat and Dell/VMWare. UK targets are more likely to have margins of five to six per cent or higher and EV/EBITDA valuations of 5-6x rather than North American targets with margins of three to four per cent and valuations of 4-5x EV/EBITDA. CTS looks to successfully apply its copy/paste/accrete/repeat discipline in Europe where its revenue synergy and vendor savings remain available,” Goff wrote.
Goff has nominated CTS to Echelon’s Q4 2020 Top Pick Portfolio, which for the third quarter returned 15.6 per cent and has year-to-date returns of 24.3 per cent and 2017-2019 returns of 215.3 per cent.
Converge, which earlier in November received conditional approval to graduate to the TSX senior board, last reported its financials on November 9 where its third quarter 2020 results featured revenue up 31 per cent year-over-year to $189.9 million and adjusted EBITDA increased by 151 per cent year-over-year to $14.6 million.
“We are a much stronger company due to our Q3 activities and our Q3 financials show the results of our Phase 3 cost savings initiatives and integration,” said Shaun Maine, CEO, in a press release. “In Q3, we generated record adjusted EBITDA, we raised $54.6 million in two successful bought deal equity financings and last week we refinanced our credit facility, entering into a new $140 million facility with a syndicate of Canadian banks.”
“We enter the fourth quarter with a strong balance sheet and cost of debt that we estimate will generate $ 8 million of annual interest savings in addition to our significant SG&A savings,” Maine said.