Converge Technology Solutions wins target raise from Laurentian Bank

IT solutions company Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, TSX:CTS) just received a target raise from Laurentian Bank Securities analyst Nick Agostino, who detailed the company’s latest moves in an update to clients on Wednesday. Agostino said an increase in the valuation multiple used for CTS is cause for the target raise, which takes his call from $9.25 to $11.00 per share to pair with his reiterated “Buy” rating.

IT and cloud solutions provider Converge Technology announced on Tuesday the closing of the acquisition of managed services provider ExactlyIT, headquartered in North Carolina and with satellite offices in Mexico. Converge paid US$26.4 million in cash, financed by its recent $172.5-million bought deal, for ExactlyIT, whose services cover cloud, analytics and cybersecurity with particular expertise in Azure and Google Cloud Services, Microsoft Solutions SAP Managed Services and End-Use Client Services.

Converge said in a press release that among ExactlyIT’s clients are Fortune 500 companies and multi-billion-dollar international enterprises in North America and Europe.

“Converge’s partnership with ExactlyIT was introduced earlier this year at our National Sales Meeting, solidifying a Managed Services alliance that began in September 2020,” said Converge CEO Shaun Maine in the press release. “The addition of ExactlyIT will play an important role in our global expansion of Managed and Cloud Services and our already existing relationship will accelerate the roll-out of services to our clients. We welcome ExactlyIT’s extensive Managed and Cloud Services experience, along with the additions they will bring to our Analytics and Cybersecurity teams.”

Converge’s share price has been on a monster run over the past couple of months, going from $5 and change at the end of April to now $9.49 per share as of close on Thursday. The company announced on April 29 the FDA approval of an over-the-counter COVID-19 test kit, Lucira Check It, developed in partnership with medical tech company Lucira Health. The kit is the first single-use, self-administered over-the-counter molecular diagnostic test for COVID-19.

CTS followed that up with first quarter 2020 financials, announced on May 11, which featured revenue up 28 per cent year-over-year to $310.2 million and adjusted EBITDA of $18.8 million compared to $11.0 million a year earlier. Over the quarter, Converge completed the acquisitions of CarpeDatum and Accudata Systems to beef up the company’s analytics, networking and security capabilities, while post-Q1 CTS completed the acquisition of Silicon-Valley IT solutions provider Dasher Technologies.

“Converge and all of its employees have continued to work extremely hard through the quarter executing on milestones such as the TSX graduation, the additional $86.5 million equity financing, the expansion of our ABL credit facility, our recent acquisitions and being recognized as both IBM and RedHat’s partners of the Year,” said CEO Shaun Maine in a press release.

On the ExactlyIT deal, Agostino noted it represents CTS’s 20th acquisition to date and called ExactlyIT an ideal platform to augment CTS’ capabilities with high-margin potential.

“We believe ExactlyIT’s in-house capabilities will compliment CTS’s Managed and Cloud Services, as well as Analytics and Cybersecurity offerings,” Agostino wrote. “The deal is another indication of CTS remaining active in strategically increasing its share of managed services revenue, from seven per cent currently to a targeted 20 per cent over a three-year period (and $100 million by 2021 year-end).”

“We note ExactlyIT’s competency center in Mexico was a key factor in the deal and should provide a competitive advantage in terms of cost savings through increased IT personnel deployment, and aid managed services GM expansion from 40 per cent to the 50 per cent target figure,” he said.

Agostino said Laurentian recently conducted a detailed assessment of the trading EV/EBITDA multiples with CTS’s IT Services space and the correlation with next 12 months EBITDA margins and determined that a 13x floor has been established, with current multiples going as high as 15x. As a result, Agostino has raised CTS’s multiple to 13x (previously 11x), saying that it adequately reflects both M&A opportunities in the US and Europe as well as margin expansion opportunities.

“We elect to use the floor multiple for CTS, which we believe adequately represents near-term M&A opportunities in the US, the company’s planned expansion into Europe with an acquisition expected before the end of Q3 and opportunities for margins improvement,” Agostino wrote. “We remind investors that CTS’s AGM to be held [on Wednesday] should offer further colour on the company’s expansion plans going forward.”

Agostino thinks CTS will deliver 2021 and 2022 revenue of $1,463.4 million and $1,665.7 million, respectively, and 2021 and 2022 adjusted EBITDA of $100.4 million and $151.4 million, respectively. At the time of publication, Agostino’s new $11.00 target represented a projected 12-month return of 17 per cent.