Nick Agostino of Laurentian Bank Securities is still counting on Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS) as a strong investment option, reiterating his “Buy” rating while raising his target price from $12.50/share to $14.50/share for a projected return of 40.4 per cent in an update to clients on Friday.
Founded in 2016 and headquartered in Toronto, Converge Technology Solutions is a North American IT solution provider offering advanced analytics, cloud, cybersecurity and managed services and solutions to clients across various industries.
Agostino’s latest update comes after Converge announced the acquisition of Michigan-based cybersecurity solutions provider Creative Breakthroughs, representing the company’s 30th acquisition.
“The acquisition of CBI further strengthens CTS’ existing cybersecurity capabilities (which include strategy consulting, intelligence, incident response, and data and application security) bringing in solid technical resources, as well as allowing CBI to integrate with key new partnerships through CTS’ platform,” Agostino said.
Creative Breakthroughs focuses on threat detection and obstruction to defend and secure networks and endpoints, testing and monitoring areas of operational risk and protection of data over the last three decades. The company’s employees include highly skilled penetration testers, application testers, incident response specialists and digital forensics experts, with offerings ranging from security programs to architecture and integration to managed security services.
All told, the acquisition comes with a US$47 million price tag, plus working capital in excess of US$3 million paid in cash at closing, with EBITDA-based earn-outs of up to US$17 million payable over three years.
Agostino notes the acquisition to be immediately accretive to Converge, as Creative Breakthroughs generated gross last 12 months revenue of $112 million and adjusted EBITDA of $9.1 million for an 8.1 per cent margin, implying a purchase multiple of approximately 6x the last 12 months adjusted EBITDA, which comes in at the higher-end of Converge’s historical 4-6x rate; in case the earn-out is paid, the multiple would be approximately 5.1x.
“CBI’s knowledge of the security landscape and the strength of their team and solutions will be a major asset for Converge’s cybersecurity practice and our ability to continue protecting our clients with the best threat defenses for their organizations,” said Greg Berard, President of Converge Technology Solutions in the company’s April 1 press release. “CBI expands our security portfolio immediately by bringing more strategic partnerships and a team of strong technical resources across North America that will provide cybersecurity expertise and value for all of our Converge clients.”
Overall, Agostino figures CTS has approximately $410 million in dry powder cash available, including $300 million on its credit facility, which Agostino notes should help the company complete its acquisition plans of adding one more North American organization along with another four potential acquisitions in Europe.
With the acquisition factored in, Agostino has revised his financial estimates for Converge going forward, elevating his 2022 revenue target from $2.3 billion to $2.38 billion for projected year-over-year growth of 56.1 per cent. Looking ahead to 2023, Agostino raised his forecast from $2.54 billion to $2.64 billion for a projected year-over-year increase of 10.8 per cent.
Agostino maintained a gross margin projection of 23.5 per cent in 2022 with an increase in gross profit from $540.6 million to $560.2 million, while a maintained margin of 24.3 per cent in 2023 leads to Agostino raising his gross profit projection from $616.8 million to $641.5 million.
Meanwhile, Agostino made slight modifications to his adjusted EBITDA projections, lowering the 2022 margin from 7.7 per cent to 7.6 per cent despite the adjusted EBITDA itself growing from $176.3 million to $180.7 million. Agostino has a similar forecast change for 2023 with the adjusted EBITDA growing from $214.4 million to $220.1 million, though the margin projects to drop from 8.4 per cent to 8.3 per cent.\
From a valuation perspective, Agostino forecasts the company’s EV/EBITDA multiple to drop from 19.2x in 2021 to a projected 10x in 2022, though he projects the multiple to rise to 14.3x in 2023.
From a return perspective, Converge’s P/E multiple in 2021 increased for 41.3x to 64.2x after a return of $0.16/share, though Agostino forecasts a drop to 19.5x in 2022 with EPS projected at $0.53/share, followed by another drop to 15.2x in 2023 with an EPS projection of $0.68/share.
Converge’s share price had a huge jump over mid-2020 to mid-2021 but the stock has been more or less flat since. CTS’ past 12-month return is about 74 per cent while since the start of 2022 CTS is currently down about five per cent.