Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS) has been on a mission to conquer the IT sector over the last few years, particularly from 2020 to now.
According to Rob Goff, analyst with Echelon Capital Markets, Converge’s growth is far from over, as he has raised his target price for Converge to $12.00 from $10.50, which at press time represented a projected return of 17%. The shift comes with EV and EBITDA values of 16.9x and 10.2x respectively against Echelon’s 2021-22 forecasts, with significant room for additional growth, both organic and inorganic, along with newly-released revenue targets of $5B at the end of 2025.
“We see room for further positive PT moves with accretive, on-strategy acquisitions building on the 22 to date,” he said, while also returning CTS to the Echelon Top Picks List. “The public versus private valuation gap supports continued value creation with M&A cadence building.”
The positive momentum continues when looking at discounted cash flow projections, where the baseline scenario supports a one-year target DCF valuation of $12.18/shr using a discount rate of 12.5% and terminal EV/EBITDA multiple of 8.5x. A further sensitivity analysis the valuation could jump well over $13.00/shr if the EV/EBITDA multiple climbs to 9.5x.
“We note our bullish scenario where acquisitions add $800M of annual revenues compares with the Company’s target of roughly $1B annually,” he said. “Our scenario reflects an average acquisition valuation put at 0.5x and 7.5x revenues and EBITDA, respectively. We have 2025 revenues/EBITDA at $4.7B/$478M with an EBITDA margin put at 10.1%.”
Converge Technology Solutions has been one of the more versatile and active companies in its space in recent times, leveraging its partnerships to gain top-tier status with Intel Corp and Palo Alto Networks, all while providing myriad specialized software solutions, with its pillars being cloud-based solutions, cybersecurity, advanced analytics, digital infrastructure, managed services, and talent solutions.
2021 has been a banner year for Converge, and the company has started reaping some of the rewards from its work after being named the North America Partner of the Year and CORE Partner of the Year by Ingram Micro at IBM’s recent Blue Series Event.
“Converge is a leading IBM partner and their dedication to IBM and Ingram Micro has not gone unnoticed,” stated Cheryl Rang, Ingram Micro’s Director, Advanced Solutions in a July 7 press release announcing the awards. “Converge represents the intersection of digital transformation and foundational infrastructure solutions. Always an active partner and a leader within the Ingram Micro and IBM Business Partner communities, Converge provides exceptional insight, guidance, and innovation around the ever-changing IT world.”
In addition, Converge’s copy-paste-accrete-repeat acquisition model showed further results with the acquisitions of Canadian companies Vicom Infinity and Infinity Systems Software, further bolstering Converge’s IBM collection.
“We are thrilled to announce that we will add Vicom Infinity and Infinity Systems Software to the growing Converge portfolio of companies across North America,” stated Greg Berard, President of Converge in a June 29 press release. “With this upcoming acquisition we will have the ability to resell the entire IBM portfolio, including Mainframe, which will continue to strengthen our partnership with IBM and Red Hat. Vicom Infinity and Infinity Systems Software will play a critical role in our sustained efforts to expand the depth and breadth of cloud and software solutions we offer our clients. Their expertise in IBM platforms, mainframe environments, and application modernization skills will greatly expand Converge’s ability to continuously meet and exceed our clients’ business needs.”
Converge may seek to acquire three to five additional North American companies in the near future, the analyst says, all while continuing to make inroads in Europe, with a particular emphasis on the United Kingdom and Germany, with Echelon expecting an acquisition in the latter market to occur by the third quarter of 2021. The idea of expanding into Germany is further supported by the recent appointment of former CANCOM CEO Thomas Volk to its board of directors.
“It’s an exciting time at Converge as they begin their expansion into the European market and I’m looking forward to being a part of the journey on the Company’s board,” Volk said in a May 20 press release. “I believe my international experience and advisory skills will be an asset to Converge as they take on the new challenge of global growth and expanding their managed services practice.”
Since the beginning of 2021 alone, the share price of Converge Technology Solutions has soared from $5.10 on January 1 to its press time valuation of $10.72, an increase of 110.2 per cent.