Converge Technology should hit $11.00, says Laurentian

Nick Agostino of Laurentian Bank Securities continues to like Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS), reiterating his “Buy” rating and target price of $11/share for a projected return of 60.8 per cent in an update to clients on Thursday.

Founded in 2016 and headquartered in Toronto, Converge Technology Solutions Corp. is a North American IT solutions provider. Converge has advanced analytics, cloud, cybersecurity and managed services offerings for clients across various industries.

Agostino’s update comes after Converge announced it had signed a definitive agreement to acquire San Diego-based PC Specialists / Technology Integration Group (TIG), a full-service ITSP specializing in optimized performance solutions and critical business support.

“The acquisition of TIG strengthens CTS’ stronghold within the U.S., particularly in the NFL cities of Los Angeles, Atlanta and Philadelphia (a key focus for the company), while also providing CTS with an additional presence in Canada, adding to its strength of offerings with the Canadian government in particular (building on its existing relationship via Portage),” Agostino said.

The proposed transaction, which Agostino noted will be immediately accretive, comes at a price tag of US$74 million in cash plus working capital, with Agostino expecting the deal to close in the second quarter of this year.

With 25 locations serving 170 countries in five continents, TIG provides hardware and software procurement services, along with discovery assessment, strategic planning, deployment, data centre optimization, IT asset management and cloud computing.

“TIG brings strong industry expertise across State, Local, and Education that we can leverage across North America and gives us additional presence in Canada, adding to our strength of offerings with the Canadian government,” said Shaun Maine, Chief Executive Officer of Converge in the company’s May 19 press release. “The combined strength of Converge and TIG’s ability to serve our clients in markets around the world will present an exciting opportunity for us to continue reaching our clients and solving their solution needs wherever they may be.”

According to Agostino, the transaction is right out of Converge’s historical playbook, as TIG generated $423 million in gross sales for the 2021 fiscal year, along with adjusted EBITDA of $14.8 million for a 3.5 per cent margin and a LTM adjusted EBITDA multiple of 5.96x, which Agostino notes to be at the high end of the company’s typical 4x-6x range.

Post-acquisition, Agostino forecasts Converge to have $270 million in cash available to execute further acquisitions, including $137 million worth of undrawn credit.

The intended acquisition prompted Agostino to raise some of his financial projections, as he now forecasts 2022 revenue to come in at $2.64 billion (previously $2.45 billion) for a year-over-year increase of 70.3 per cent, while his 2023 forecast is now set at $3.1 billion (previously $2.72 billion) for a year-over-year increase of 17.1 per cent.

Meanwhile, Agostino also raised his overall adjusted EBITDA forecast for 2022 to $173.6 million (previously $166.4 million), though the projected EBITDA margin dropped from 6.8 per cent to 6.6 per cent. Looking ahead to 2023, Agostino forecasts $227.3 million in adjusted EBITDA (previously $212.7 million), with the margin again shrinking from 7.8 per cent to 7.3 per cent.

From a valuation standpoint, Agostino forecasts the company’s EV/EBITDA multiple to drop from the reported 12.3x in 2021 to a projected 8.8x in 2022, then to a projected 6x in 2023.

Converge’s stock price has dropped by 32.7 per cent over the course of 2022 after an early peak of $11.41/share on February 9, though it has recovered slightly after hitting a 2022 low of $6.09/share on May 12.