Converge Technology Solutions scores a target raise from Laurentian

Laurentian Bank Securities analyst Nick Agostino likes the new pickup by Canadian IT services company Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS). Agostino reviewed the acquisition in an update to clients on Wednesday where he maintained his “Buy” rating on CTS and raised his target price from $12.50 to $12.75 for a projected one-year return of 26.5 per cent at the time of publication.

Converge delivers IT solutions and services and has offerings in advanced analytics, cloud, cybersecurity and managed services. The company announced on Wednesday the acquisition of German-based Visucom GmbH along with its subsidiary School Supplies 4.0 GmbH, marking the 27th acquisition by Converge since October 2017. Total consideration for the deal is €5.2 million paid in cash at the time of closing.

Visucom is a supplier of media devices including professional screens, interactive blackboards, loudspeakers, cameras, projectors, displays and media controls for education and public sector clients and offers on-site installation and training services.

“In recent years, we have worked very successfully with Visucom, which now, as part of Converge, perfectly complements our audiovisual offerings,” said Barbara Weitzel, Managing Director of REDNET GmbH, a Converge Company, in a press release. “We are pleased that we can offer our public sector clients an even more comprehensive service and product portfolio from a single source, as well as further support their digitization efforts with the help of Visucom.”

Looking at the deal, Agostino said Visucom will be acquired at a very accretive multiple, as its revenue over the last 12 months was €7.2 million and adjusted EBITDA was €1.8 million (25.0 per cent margin), reflecting a 3x adjusted EBITDA multiple, which Agostino said is below the historical 4-5x range CTS has typically paid. Agostino said the discount is likely due to the small scale of the transaction.

“We believe the acquisition offers a host of advantages, including: 1) delivers another acquisition in the European market, specifically in Germany, and puts CTS on a good pace to add four to six acquisitions per year in Europe (and a similar amount in N.A.); 2) having worked with REDNET for a few years, bringing Visucom’s services in-house expands REDNET’s educational offering as it looks to expand its market share within its existing three German provinces, and penetrate another three targeted regions; 3) allows Visucom to offer its German clients a broader set of service offerings beyond its audiovisual media, to include CTS’ professional and managed services; and, 4) demonstrates to us REDNET’s execution of its growth strategy by leveraging CTS’s balance sheet,” Agostino wrote.

Agostino has updated his estimates, including an added ten basis points to his overall EBITDA margin for 2022 and 2023. By the numbers, Agostino is calling for Converge to deliver full 2021 revenue of $1,500.7 million (up 58.2 per cent year-over-year), 2022 revenue of $2,415.7 million and 2023 revenue of $2,622.6 million. On adjusted EBITDA, he has estimated full 2021 EBITDA of $85.5 million (compared to $60.5 million in 2020), 2022 EBITDA of $166.6 million and 2023 EBITDA of $233.1 million.

Agostino said his new $12.75 target is based on a 14x multiple of 2022/23 EV/EBITDA estimates and that CTS is currently trading at pro-forma 13.6x next 12 months EBITDA versus its peers at 11.9x including outliers. 

Converge had an up-and-down back half to 2021 but managed an overall return for the year of 119 per cent. So far in 2022, the stock is up about four per cent.

Converge last reported earnings in mid-November where its third quarter 2021 featured revenue up 93 per cent year-over-year to $367.3 million, gross profit up 60 per cent to $83.8 million and adjusted EBITDA up 29 per cent to $18.9 million. The company posted record cashflow from operations of $48.1 million, up 86 per cent year-over-year. On the M&A front, Converge completed the major acquisition of German IT services provider REDNET AG along with two IBM software and services providers Vicom Infinity and Infinity Systems Software. The company also closed on a $259-million equity financing at $10.55 per share.

“Converge continues to execute on all aspects of its strategy and we are extremely enthusiastic to have closed our platform acquisition in Europe. The Company continues to invest in talent and expand its service capabilities to its customers across North America and Europe, as reflected in our very impressive recurring revenue managed services growth,” said Shaun Maine, CEO of Converge, in a November 10 press release. 

“Additionally, 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,” he said.