Nick Agostino of Laurentian Bank Securities has increased optimism about Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS), reiterating his “Buy” rating while increasing his target price from $13.25 to $13.75/share in an update to clients on September 1.
Founded in 2016 and headquartered in Toronto, Converge Technology Solutions is a North American IT solutions provider focused on delivering industry leading solutions and services. Converge’s offers advanced analytics, cloud, cybersecurity and managed services offerings to clients across various industries.
Agostino’s latest analysis comes after Converge completed an upsized bought deal originally launched on August 24, in which the company raised an additional $259.1 million in proceeds with 24.55 million common shares offered at a price of $10.55/share. The company said it would use the proceeds for acquisitions, working capital and other general corporate purposes.
“Following the deal, alongside its credit facility, we estimate CTS has $421.6 million in dry powder to continue its ambitious North American and European M&A plans and have net cash of $163.6 million,” Agostino said in his report.
Converge announced its second quarter financial results in August, headlined by a 51.6 per cent year-over-year increase and 11.3 per cent sequential growth in revenue to $345.3 million. The company also reported a 43 per cent year-over-year gross margin increase to $78.2 million for a 22.6 per cent margin, while EBITDA experienced an 86 per cent year-over-year increase to $21.7 million for a margin of 6.3 per cent.
“The team continues to execute in all aspects of our business as we focus on providing best in class solutions to our increasing roster of valued customers,” said Shaun Maine, CEO of Converge in an August 11 press release. “In addition to our exceptional North American growth, we are extremely excited to have closed our platform acquisition in Europe and we look forward to replicating our North American success overseas.
“To further expand our investor base around our European expansion, the Company will be exploring a secondary listing on the London Stock Exchange,” Maine added. “Our scale and reach as well as the depth of expertise within our key practice areas make Converge one of the premier IT solutions providers in the market and we look forward to continuing to deliver for our valued customers, shareholders, employees and stakeholders.”
Agostino said the company has also continued making inroads into Germany after completing its acquisition of a 75 per cent stake in Germany-based ITSP provider REDNET in August, with the analyst noting the company has non-disclosure agreements in place with as many as four additional German companies to further expand its footprint in the country.
Agostino’s financial projections have the company hitting significant financial milestones this year, headlined by breaking into 10-digit revenues with a $1.7 billion projection for 2021, a potential 77.5 per cent year-over-year increase. Agostino forecasts the momentum to continue through at least 2023, with a projection of $2.25 billion (33.7 per cent year-over-year increase) in play for 2022, followed by a projected $2.43 billion (7.9 per cent year-over-year increase) for 2023.
Agostino forecasts gross profit of $402.4 million for 2021, which represents a year-over-year increase of 72.7 per cent, though it also marks a slight dip in the gross profit margin from 24.6 per cent to 23.9 per cent. However, the margin is forecast to rebound to 26 per cent ($585.8 million) in 2022, then rise again to 26.7 per cent ($649.8 million) in 2023.
The company’s adjusted EBITDA and EBITDA margin are both forecast to rise over the next two years, beginning with a forecasted increase to 6.7 per cent margin ($112.5 million positive EBITDA) for 2021, then moving to a projected eight per cent margin ($181.3 million positive EBITDA), followed by another jump to an 8.8 per cent margin ($213.8 million positive EBITDA) for 2023.
With a slight decrease in the earnings per share from $0.25/share to $0.24/share, Agostino’s price-earnings ratio projections rise slightly from 2020 to 2021, as he forecasts the ratio to be 50.9x in 2021 before dropping to 24.6x in 2022.
Meanwhile, Agostino projects the EV/EBITDA multiple to drop from 22.4x in 2020 to 18.3x in 2021, with another drop to 12.6x projected for 2022.
From here, Agostino believes Converge’s next target for market entry will be the United Kingdom, with a plan to acquire between three and five European companies annually.
“Here we remind investors that CTS is engaging with targets with £75-200 million in revenue each per annum and is also looking at establishing a shared back-office service centre in Ireland for all of Europe,” he said. “We believe Board Chair Thomas Volk’s experience within the U.K. market through his time at Dell, as well as mid-market know-how will come in handy in successfully tackling the intricacies associated with this particular geography, again much like in Germany.”
At press time, Agostino’s new target of $13.75 represented a projected one-year return of 14.9 per cent. Overall, Converge’s share price has risen by 153 per cent over the year to date.
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