Look for another bang-up year from Canadian IT solutions provider Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), according to Echelon Capital Markets analyst Rob Goff, who has returned Converge to Echelon’s Top Picks Portfolio for the opening quarter. In client report on Tuesday, Goff reiterated his “Speculative Buy” rating for CTS and $14.50 target price, which at the time of publication represented a projected one-year return of 33.4 per cent.
Toronto-headquartered Converge has regional sales and services businesses that provide IT solutions including advanced analytics, cloud, cybersecurity and managed services, with business in Canada, the US and expanding operations in the UK and the EU.
The $2.3-billion market cap company was a big winner over the past couple of years where the stock returned 255 per cent in 2020 and 119 per cent last year.
But Goff sees further upside to the name, banking on CTS’ strong fundamentals and potential for a number of catalysts coming from acquisitions, organic growth and a possible listing on the London Stock Exchange.
“We look for CTS’s well-proven copy/paste/accrete formula to maintain its cadence in North America while it expands in Germany and enters the UK to continue adding shareholder value. Having now completed 25 acquisitions since Q317 with the Company’s 53 per cent-owned subsidiary Portage CyberTech Inc.’s recent purchase of OPIN Digital Inc., we look for CTS to move forward executing against its deep pipeline of strategic, accretive acquisitions,” wrote Goff in his report.
Goff said supply chain constraints negatively impacted CTS’ third quarter 2021 results but that the company’s record bookings at $250 million (up from $50 million a year earlier) show the strength of the company’s operations.
“We look for Q421 results to be judged against revenues plus bookings. Consequently, we look for revenues plus booking to reflect strong demand. We do caution that bookings may be boosted by clients advancing orders to be earlier in the queue as supply deliveries are received. We look for a significant catch-up in H222 as pent-up demand can be met,” Goff said.
Longer term, Goff said Converge’s scale is strengthening its organic prospects while inorganic growth could come from acquisitions where companies have been impacted to a greater degree than CTS by supply constraints.
“We would look for one deal in Q122 to kickstart the calendar year, with a robust pipeline to follow,” Goff said.
On Converge’s third quarter 2021, announced on November 10, the company saw revenue grow by 93 per cent year-over-year to $367.3 million and adjusted EBITDA increase by 29 per cent to $18.9 million. CTS posted record cashflow from operations of $48.1 million and registered gross profit up 60 per cent year-over-year to $83.8 million. On the M&A front, Converge’s Q3 saw the completion of its acquisition of Germany’s REDNET AG along with Vicom Infinity and Infinity Systems Software, while the company also closed on a $259-million equity financing round at $10.55 per share in September.
“Converge continues to execute on all aspects of its strategy and we are extremely enthusiastic to have closed our platform acquisition in Europe,” said CEO Shaun Maine in a press release. “The Company ended the quarter with $210 million of cash on-hand driven by extremely strong free cash generation from our business, with $190 million in available capacity under our ABL credit facility.”
Last month, Converge announced its 25th acquisition made by it or its affiliates, with the latest being the acquisition of OPIN Digital by Converge’s 53-per-cent owned subsidiary Portage CyberTech, the first such acquisition by Portage.
Goff provided his comps on Converge, saying CTS shares are currently trading at 11.5x and 9.3x 2022 and 2023 EV/EBITDA, respectively, which compares to its US IT Solution Provider peers averaging 11.9x and 13.0x, respectively, its Canadian peers at 11.2x and 9.4x, respectively, and its European peers at 18.7x/16.6x, respectively.
“We look for Converge to move forward executing against its deep pipeline of strategic, accretive acquisitions. We could see the current supply chain issuers encouraging smaller providers to pursue an exit,” Goff wrote. “Our frequent positive price target moves have often coincided with accretive acquisitions where the Company’s ability to source and execute accretive deals (now 25 since Q317) has enabled it to achieve a scale where its cross-selling revenue generation, vendor advantages, and platform efficiencies support continued accretive inorganic growth. The most recent extension of its A/P terms to 75 days from 65 reflects its vendor leverage.”
As for Echelon’s Top Picks Portfolio (TPP), Goff said overall it delivered a negative 4.3 per cent return for the fourth quarter 2021 and a 19.4 per cent return for the year. The three-year performance by Echelon’s TPP were 109.3 per cent and 426.1 per cent, respectively.