Converge Technology has an 88 per cent upside, says Eight Capital

A new tuck-in acquisition looks good on Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), according Christian Sgro, analyst for Eight Capital. In a Monday update, Sgro reiterated a “Buy” rating and $11.00 target price on Converge, saying the acquisition will generate some good synergies with Converge’s existing operations.

Canadian IT solutions provider Converge Technology announced on Monday the acquisition of Toronto-based Newcomp Analytics in a $20.3 million deal. Newcomp has advisory and development services to help businesses manage their data strategies. The company has business in North America and works with large data vendors like Microsoft and Alteryx and has brand-name customers like DHL and Clorox.

The acquisition represents the 34th pickup by Converge and its affiliates since 2017.

“Converge is excited to expand our advanced analytics portfolio and offerings with the addition of Newcomp Analytics,” said Greg Berard, President and North American CEO of Converge, in a press release. “Newcomp Analytics will greatly enhance Converge’s ability to help our clients become even more insight-driven and dive deeper into understanding and analyzing their data.”

Looking at the deal, Sgro noted that Newcomp has trailing 12 months gross revenue of $36.4 million and adjusted EBITDA of $3.4 million, putting the $20.3 million purchase price at 6x EBITDA, which is at the higher end of Converge’s range. 

But Sgro said the acquisition still looks attractive due to the higher value analytics offering presented by Newcomp along with the company’s managed services component and strong margin profile. Overall, Sgro said the impact of the deal was “slightly positive” for Converge.

“Despite the smaller size we see the announcement as incrementally positive given the following: 1) data analytics focus as an attractive end market, 2) managed services component and margin profile, and 3) negligible impact on overall debt and leverage, providing flexibility for continued and larger M&A,” Sgro wrote.

“Newcomp counts 80+ employees which will add to Converge’s analytics capabilities and managed services teams. We expect it will be difficult to attract talent in these areas as Converge scales in North America. Newcomp also hosts customer workshops as part of its go-to-market strategy, complementary to Converge’s strategy,” he said.

Looking ahead, Sgro said with an updated net debt balance of $215.5 million, Converge still has ample capacity for a UK platform acquisition, something the analyst sees as part of the European plan for Converge. 

“Given that Converge has effectively met its +$1 billion annual gross revenue M&A target in 2022, we believe Converge can be strategic/disciplined on timing, the purchase price, and cultural alignment,” he said.

With a market cap of $1.3 billion, CTS was a clear winner over the first stretch of the pandemic, where the stock returned 670 per cent over 2020 and 2021 combined. But the market pullback this year has dropped CTS from a high of $12.85 per share last September to now just under $6.

Sgro’s 12-month target of $11.00 represented at press time a projected return of 88.0 per cent.

Last week, Converge Technology reported its second quarter 2022 financials, featuring gross revenues up 61 per cent year-over-year to $729.7 million and adjusted EBITDA up 80 per cent to $39.2 million. Adjusted EPS went from $0.08 per share a year ago to $0.14 per share.