Converge Technology has a 151 per cent upside, says Eight Capital

Something’s up with Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), but at this point we don’t know what, exactly. The Canadian IT and Cloud Solutions provider announced on Tuesday that it’s undergoing a strategic review, prompted by expressions of interest from a number of outside companies. Mulling over the prospects is Eight Capital analyst Christian Sgro, who in a Wednesday comment said the news is not surprising considering the drop in share price over the past year even as the company looks very much to be in good form.

First off, the sole quote in the Converge press release was this: “Our management team is fully aligned with the Board’s decision to explore strategic options to maximize shareholder value,” said Shaun Maine, CEO.

Then to Sgro’s thoughts: “We view the announcement as positive and are not overly surprised given the recent pressure on the stock which we believe is unwarranted. We speculate that private equity investors are interested at these levels given the attractiveness of the company’s cash flow generative profile and margin expansion potential.”

Converge was flying high over the first two years of the pandemic, as the stock went from under a dollar in early 2020 to as high as $12.85 by September, 2021. It’s been mostly downhill from there, however, with the current month being a particular low point where CTS has gone from $7 at the start of the month to even under $4 before being picked up on the strategic review announcement.

For his part, Sgro said the stock has likely been under pressure due to a recent miss in its third quarter report, along with a softening macro environment more broadly. 

But the analyst has faith in the name, saying its medium-term fundamentals are well-insulated with the strong software sales expected in the fourth quarter and likely product strength over the first half of 2023.

“We believe the seasonal strength in Q4 and the normalization of the company’s backlog de-risk the medium-term outlook, making the stock attractive at current prices,” he said.

On valuation, Sgro is putting Converge in a range of $7.50 to $10.00 after looking at comparable value-added resellers (VARs) and IT service providers which trade on average at around 9x EV/adj. EBITDA. He estimated CTS to be currently trading at 5.4x his EV/adj. EBITDA estimate compared to its VAR and ITSP peers at 9.2x and Global Service Providers at 12.1x. With his update, Sgro maintained a “Buy” rating on CTS and $10.00 target, which at press time represented a projected one-year return of 151 per cent.