Converge Technology is a Top Pick, says Echelon

Ahead of third quarter results from Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), Echelon Capital Markets analyst Rob Goff trimmed his target price on the stock in a Thursday report to clients while maintaining Converge as a Top Pick with strong organic growth prospects.

IT solutions provider Converge is set to deliver its Q3 report on November 8 after market close, while Goff is being a bit more conservative on the quarterly numbers, maintaining his revenue call at $617 million but lowering his EBITDA forecast from $39.5 million to $32.2 million (compared to the consensus call at $39.9 million). Goff said higher SG&A costs related to acquisitions are part of the issue along with a seasonally weaker quarter. 

Looking further ahead, Goff has also brought down his fourth quarter topline from $801.8 million to $785.0 million and EBITDA from $61.5 million to $54.1 million, while for 2023, he is now projecting revenue of $3.175 billion, down $164.1 million, and EBITDA of $219.1 million, also trimmed by $6.3 million.

“We are adopting a conservative stance in part to reflect macro-political and economic conditions. We hold the potential for revenue and in turn EBITDA outperformance as supply chain constraints are removed and the $507 million pipeline of firm contracts moves to booked revenues. We would look for the pipeline to move towards more normalized levels approaching $200 million. We realize that transacting against its pipeline could represent ~10 per cent growth in 2023 revenues where constraints are sufficiently removed,” Goff wrote.

With the revised numbers, Goff has maintained a “Speculative Buy” rating on CTS while dropping his target from $12.00 to $11.00, which at the time of publication represented a projected one-year return of 63 per cent. Converge’s share price has been sliding for much of 2022, with the stock currently down about 45 per cent year-to-date and down about 49 per cent for the past 12 months.

Goff said his still-bullish thesis on Converge connects with a projected 13 per cent 2023 free cash flow yield, which he said can provide downside support and “tremendous flexibility” for the company’s active M&A program and share buybacks. Goff said he could even see management introducing a modest dividend in 2023, projecting that a five per cent yield dividend would represent about one-third of the company’s free cash flow, leaving the company enough for further acquisitions. 

“We look for CTS’s well-proven copy/paste/accrete formula to maintain its cadence in H223 as it becomes further refined with vertical specialization and cross-sector service capabilities emerging into focus,” Goff wrote. 

“We look for existing concerns around organic growth to be positively addressed where double-digit organic revenue and profit emerge following the integration of recent acquisitions and a higher degree of cross-selling from vertical specialization. With an easing of supply chain headwinds, we see CTS drawing down on its $475 million backlog posting strong double-digit organic growth,” he said.