Converge Technology is a Buy, says Laurentian Bank

Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS) was a big winner over the first two years of the pandemic but 2022 has been a different story, with the stock down plenty so far this year. But Nick Agostino of Laurentian Bank Securities still has lots of confidence in the stock, reiterating his “Buy” rating and a target price of $11/share for a projected return of 60.8 per cent in a recent update to clients.

Founded in 2016 and headquartered in Toronto, Converge Technology Solutions is a North American IT solutions provider offering advanced analytics, cloud, cybersecurity and managed services to clients across various industries. Agostino’s analysis arrived after Converge announced it had signed definitive agreements to acquire a trio of German-based IT companies focused on the education market.

“[The acquisitions] combined with the previously acquired REDNET and Visucom assets strengthen CTS’ German presence, especially within its Education market, offering cross-sell potential across this market and supporting CTS’ plans to expand REDNET’s Education market presence beyond its initial three German provinces,” Agostino said in his June 15 report.

The three acquisitions are Gesellschaft für digitale Bildung (GfdB), a Hamburg-based supplier of hardware and software products for advanced training and comprehensive technical/consulting services; Tutzing-based Institut für moderne Bildung (IfmB), which supplies hardware, software and comprehensive services to drive the digitization of schools with a focus on sustainability and innovation; and DEQSTER, another Hamburg-based operator which develops and produces equipment for digital learning and working, including tablet cases, protective sleeves, digital pencils, charging cables, chargers and adapters.

The total consideration for the three acquisitions is $33.7 million (€25 million), along with three additional earnouts that could be worth as much as $6.7 million (€5 million), contingent upon the combined companies reaching an adjusted EBITDA contribution of $14.6 million (€10.8 million) in 2024.

As of March 2022, the three companies reported combined LTM revenue of approximately $106 million, paired with approximately $10 million in adjusted EBITDA for a 9.4 per cent margin.

“The additions of GfdB, IfmB, and DEQSTER to Converge’s portfolio of companies in Germany will be a major leap forward in our ability to strongly serve the German market,” said Shaun Maine, Chief Executive Officer of Converge in the company’s June 15 press release. “Building on the successes of REDNET, A Converge Company, and Visucom, A Converge Company, GfdB, DEQSTER, and IfmB will also allow us to become the leading education partner in Germany and will help us continue growing solution offerings and services for our clients in Europe.”

Since the announcement of the German acquisitions, Converge also announced the acquisition of Notarius, a Quebec-based provider of solutions that safeguard the long-term reliability of electronic documents, through its Portage CyberTech subsidiary.

“One of Canada’s and Quebec’s most respected names in digital identity and digital signatures, Notarius, is also far and away the leader in building and successfully maintaining large trust ecosystems, sometimes involving thousands of entities. This acquisition positions Portage CyberTech as an industry leader as digital identity evolves to include trusted data,” said Don Cuthbertson, CEO of Portage Cybertech on June 20. “In addition to being the leader in trust ecosystems, the Notarius acquisition will eventually allow us to add digital signature functionality to other offerings within our platform, as well as open the door to hundreds of new potential clients.”

With Agostino assuming an early August closing on the German acquisitions, he has taken the step of revising his financial projections for the company, slightly raising his 2022 revenue target from $2.64 billion to $2.68 billion for a potential year-over-year increase of 75.6 per cent. Looking ahead to 2023, Agostino has made similar increases from $3.1 billion to $3.19 billion for a potential 18.8 per cent year-over-year increase.

Agostino also made minimal changes to his adjusted EBITDA estimates, raising his 2022 forecast from $173.6 million to $177.9 million while maintaining an adjusted EBITDA margin of 6.6 per cent. Agostino made a similar shift for 2023, raising his estimates from $227.3 million to $235.7 million, with the margin increasing from 7.3 per cent to 7.4 per cent.

From a valuation perspective, Agostino forecasts the company’s EV/EBITDA multiple to come in at 7.8x in 2022, then dropping to a projected 5.4x in 2023 to present a discount to the VAR and NTSP peer group average of 8.3x, as well as the systems integrators peer group average of 10x.

Looking ahead, Agostino predicts Converge will continue to make use of the estimated $270 million in dry powder it has available, along with $137 million worth of undrawn credit.

“Having now transacted in Germany, we look for the focus to shift to a beachhead transaction in the U.K. as well as opportunities to add to its Managed Services sales stream,” Agostino said.

Converge Technology Solutions has capitulated to about a 47 per cent loss year-to-date, falling off after hitting an early peak of $11.41/share on February 9 and dropping as low as $5.72/share on June 16.