Converge Technology is a double, says Echelon

Just-released quarterly numbers from Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News Analysts, Financials TSX:CTS) have Echelon Capital Markets analyst Rob Goff staying bullish on the stock. Goff delivered an update to clients on Wednesday where he reiterated his “Speculative Buy” rating for Converge along with a maintained $14.50 target price, saying the company’s organic as well as inorganic growth prospects are set to improve.

IT solutions provider Converge Technology announced first quarter earnings on Tuesday, showing net revenue up 77 per cent year-over-year to $550.0 million with organic gross revenue growth of 7.2 per cent. Adjusted EBITDA was up 58 per cent to $29.6 million and adjusted EPS was up 25 per cent to $0.10 per share. 

Converge said its bookings backlog grew to $472 million compared to $350 million at the end of the fourth quarter 2021, with the company having cleared $250 million of backlog over the Q1. On the M&A front, Converge said it has completed five acquisitions year-to-date, adding about $398.7 million of last 12 months gross revenue and about $29.4 million in EBITDA. The acquisitions include Paragon Development Systems, Visucom GmbH, Creative Breakthroughs and Interdynamix Systems.

“Demand was extremely strong, as we generated approximately $575 million in product orders from customers throughout Q1, combined with an improvement in the supply chain, where $250 million of the $350 million backlog that we reported in Q4 was invoiced in Q1,” said CEO Shaun Maine in a press release. “With now over $472 million in product backlog entering Q2, accounting for 24% of Converge’s total 2021 gross revenue, Converge is poised for strong double-digit organic growth as the supply chain normalizes.”

Converge’s share price was down a couple of percentage points in early trading on Wednesday after the quarterly release, which came after market close on Tuesday. CTS, which rocketed ahead in 2020 and 2021, has been less positive this year, which is consistent with the wider market rotation away from tech and growth stocks. Year-to-date, Converge is currently down about 35 per cent.

Looking at the quarterly numbers, Goff called it an aggressive revenue outperformance which supports robust, double-digit underlying organic growth. The $550.0 million in revenue was well above both Goff’s estimate at $475.2 million and the consensus call for $499.3 million, while the $109.0 million in profits was a touch below Goff’s estimate of $111.7 million and the Street’s $114.0 million. 

More broadly, Goff said continuing global supply chain headwinds are likely to help migrate customers to larger IT Services companies like CTS and thus strengthen organic growth while the company is also likely to strengthen shareholder value through continued consolidation within the industry.

“We look for CTS’s well-proven copy/paste/accrete formula to maintain its cadence in N. America while it expands in Europe to continue adding shareholder value. Having completed 30 acquisitions, we continue to look for CTS to move forward executing against its deep pipeline of strategic, accretive acquisition targets. With $217 million of cash and a $300 million line available, management believes it can finance the near-term pipeline candidates from existing resources,” Goff wrote.

“CTS’s ability to source and execute accretive deals has enabled it to achieve a scale where its cross-selling revenue generation, vendor advantages and platform efficiencies support continued accretive inorganic growth,” he said.

Up ahead, Goff said catalysts for the company include additional North American acquisitions in the second quarter followed closely by prospective European acquisitions. Goff said the flow of first half 2022 acquisitions and the gaining of scale in Europe will make a listing on the LSE a positive revaluation catalyst, although that move is likely an early 2023 event.

“We allow that a backlog purge timeline may extend towards a building purge exiting 2022 and entering 2023; however, political uncertainty along with pandemic cautions leave us cautious,” Goff wrote.

By the numbers, the analyst is now calling for full 2022 revenue and adjusted EBITDA of $2.496 billion and $176 million, respectively, and 2023 revenue and EBITDA of $2.956 billion and $228 million, respectively. EPS is expected to go from $0.06 per share in 2021 to $0.33 per share in 2022 to $0.56 per share in 2023.

In terms of valuation, Goff has CTS’ EV/Revenue going from 1.5x in 2021 to 0.6x in 2022 to 0.5x in 2023 and the company’s EV/EBITDA going from 14.5x in 2021 to 8.8x in 2022 to 9.4x in 2023. On a comps basis, Goff has Converge currently trading at 8.8x/6.2x 2022/2023 EV/EBITDA against its US IT Solution Provider peers who average 10.1x/9.3x, against its Canadian peers at 9.5x/8.2x and its European peers at 11.6x/10.2x. 

At the time of publication, Goff’s price target of $14.50 represented a projected one-year return of 100.6 per cent.