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Converge Technology is still a Buy, this portfolio manager says

The stock looks like it’ll finish the year at more than a double, but the good times are likely to continue for Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), according to Michael Hakes of the Murray Wealth Group.

“We actually own a bit of Converge Technology in our global growth portfolio. We’re very positive on this over the longer term, as they roll up [with] their growth by acquisition story,” said Hakes, senior portfolio manager at Murray Wealth, who spoke on a BNN Bloomberg segment on Wednesday.

“We think they will be successful in their year [ahead] and we like this over the long term,” he said.

Toronto-based IT solutions provider Converge Technology had a whale of a time last year when the stock went through the roof as a strong pandemic play where its business in advanced analytics, cybersecurity and managed services found favour with customers and Converge expanded its reach into new territories and marketplaces. CTS went from $1.40 per share at the start of 2020 to $4.97 by the end of the year for a return of 255 per cent. 

But where other tech companies saw their share prices stall and in some cases drop over 2021, Converge has kept the party going. CTS graduated from the TSX Venture to the senior board earlier this year and has picked up the pace on the acquisition front, with the results evident on the charts where Converge is currently up about 125 per cent year-to-date.

On the M&A front, Converge is executing on a multi-year strategic plan to acquire companies in the value-added reseller (VAR) field at a rate of about four to six acquisitions per year. The company had five acquisitions in 2020 with some of the deals coming in Canada and some in the United States, while so far in 2021 CTS has completed eight acquisitions including German IT service provider REDNET AG, its first foray into Europe. All told, Converge has made over two dozen deals since 2017.

The company prides itself on seamless integration of its acquisitions along with taking advantage of the cross-selling opportunities that can result.

“One of the key differentiations of Converge is our ability to integrate acquisitions,” said Converge CEO Shaun Maine in the company third quarter 2021 conference call. “And we’ve now integrated 19 of the 24 acquisitions that we’ve completed. These integrations include not just people, but tools in areas such as project management, professional services, IT, finance and inside sales. Even though the pace of acquisition has accelerated this year, the integration team has expanded the scope of integration and will be rolling out a common CRM platform in January.”

For that third quarter 2021, Converge saw revenue grow by 93 per cent year-over-year to $367.3 million while adjusted EBITDA grew by 29 per cent to $18.9 million. The company generated record cash flow from operations of $48.1 million, up 86 per cent from a year earlier, while annual recurring revenue from managed services grew by 34 per cent to $81.1 million. During the quarter, Converge also boosted its balance sheet with a $259-million equity financing round at $10.55 per share

“We continue to execute on our acquisition strategy as well and have the most robust pipeline we have ever had. Having a strong cash position and generating such strong free cash flow will enable us to execute on the next phase of our expansion in both North America and Europe,” said Maine.

Converge’s management has said that global supply chain issues have impacted many of its vendors, especially in the endpoint device field, and the disruption has somewhat dampened bookings, i.e., orders received from customers. At the end of the third quarter, CTS’ bookings stood at about $250 million but the company said that number could have been $100 to $150 million more if it weren’t for the supply chain issues.

“Normally, we see bookings convert into revenue in four to six weeks, but as some of you will have heard from vendors like Dell and Apple, these dates are being greatly extended due to manufacturing facilities not being able to run at full capacity, and they expect issues to continue into 2022,” Maine said.

“In addition, our operating costs were impacted by a mismatching of our employee costs and configuration installation, managed services and other services areas who were not able to execute as a result of product delivery date delays. We continue to communicate with our vendors on these issues and believe that the strong demand we are seeing will results in deferred revenue, but not lost revenue,” he said.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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