Converge Technology has a long runway ahead, this investor says

Canadian technology stocks are down across the board this year and while the general market mood against owning tech shows no signs of letting up investors should be focusing on solid companies with good growth prospects, with Converge Technology Solutions (Converge Technology Stock Quote, Charts, News, Analysts, Financials TSX:CTS) being a prime example. So says portfolio manager Jamie Murray of the Murray Wealth Group, who likes the company’s roll-up strategy in the IT space.

“We’ve been buying Converge recently. This is still really in the early innings of the whole company playbook,” says Murray, speaking on BNN Bloomberg on Tuesday. 

“Coverage is an IT service provider and what they’re doing is buying companies that serve as outsourced IT for small and medium-sized businesses, and their playbook is to acquire these companies and increase cross-selling by introducing new services with a particular focus on managed services — so, more higher-margin, long-term service oriented contracts versus selling computer hardware and equipment,” Murray said.

Toronto-based Converge made one of those M&A moves recently by announcing a deal to acquire San Diego-based PC specialists Technology Integration Group (TIG) for US$74 million. A 40+ year-old company, TIG has custom-built IT solutions for its clients in enterprise, government, education and the small to med-sized business group and the company has 20 offices in North America and business in 70 countries worldwide. 

Converge said TIG, now the company’s 31st acquisition since late 2017, fits in well with its expansion strategy.

“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 Converge CEO Shaun Maine in a 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.”

Canada’s tech sector has a number of serial acquirers with the likes of Constellation Software, OpenText and Enghouse Systems, and Converge’s own approach to M&A seemed to have found favour with investors for a couple of years when the stock went from less than a dollar in 2019 to as high as $12.00 per share by last September. Then came a levelling off period before the stock started dropping in earnest by December, falling now to the $7-$8 range. 

But Murray likes where the company is headed, even if it may take a little while yet for Converge to prove itself to investors.

“They’re able to take out some costs and some working capital when they do these acquisitions, so [their strategy] works,” Murray said. “We should see the EBITDA margins increase over the long term from the mid-single digit five, six, seven per cent range hopefully upwards to the ten per cent range over the next few years. And if they do that we think there’s going to be a lot of value that’s created in Converge.”

“The company has done a good job to date but it’s still early days in their strategy. We’ll have to see how it plays out over the next couple of years to really judge it,” he said.

By the numbers, Converge reported a 77 per cent year-over-year increase in revenue in its latest quarter, hitting $550.0 million for its first quarter 2022 with an organic gross revenue growth rate of 7.2 per cent. Adjusted EBITDA was also up 58 per cent to 429.6 million and the company said its booking backlog grew sequentially to $472 million compared to $350 million for the previous quarter. 

“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 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.”

Commenting on the quarter was Echelon Capital Markets analyst Rob Goff who said the Q1 represented an aggressive revenue outperformance. 

“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,” wrote Goff in a May 11 report.

Goff reiterated his “Speculative Buy” rating on CTS and 12-month target of $14.50, which at the time of his report’s publication represented a projected return of 100.6 per cent.