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Converge Technology Solutions is a Top Pick, says Echelon

The stock has been thrown for a big loss over the past couple of years, but investors should be looking at the positive when it comes to Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), according to Echelon Capital Markets analyst Rob Goff, who sees signs of building momentum in the name. In a Tuesday report, Goff reiterated a “Speculative Buy” rating on Converge, saying the stock is significantly undervalued.

Toronto-headquartered Converge is a North American IT solutions provider with advanced analytics, cloud, cybersecurity and managed services for clients. The stock did very well over the first year-and-a-half of the pandemic, rising from around $1 per share in early 2020 to as high as $12 by mid-2021. Since then it’s been mostly downhill, however, with CTS currently trading around the $4 mark.

Goff characterized CTS as currently in the penalty box as far as the market goes, but, focusing on the company’s revenue and particularly its backlog, the analyst sees better days ahead. Goff said backlog clearance for the company is now measured in six to eight weeks versus six to eight months as it was a year ago and he sees the potential for the company’s first quarter 2023 revenue and backlog levels to exceed expectations.

M&A activity should also pick up for Converge Technology, according to Goff.

“Beyond our expectation of improved momentum as supply chain constraints fade, we see the opportunity for CTS to re-engage its well-proven copy/paste/accrete formula in H223 where its emerging vertical specialization and cross-sector service capabilities support revenue synergies and managed services growth precedes margin gains. We are returning CTS to our Top Pick Portfolio considering its fundamental value and takeover prospects,” Goff wrote.

As well, Goff thinks Converge is likely to draw attractive buyout offers, putting a potential value realization of $7 to $9 per share on the stock.

Up ahead, Goff is expecting Converge to see revenue decline by three per cent in 2023 and reach $2,434.3 million, while adjusted EBITDA is forecasted to hit $193.7 million versus $142.9 million for 2022. 

Goff reiterated a $9.00 target price on Converge, which at press time represented a projected one-year return of 121 per cent.

“Takeover considerations aside, we consider CTS shares to be significantly undervalued at 6.7x/5.5x 2023/24 EV/EBITDA. We continue to stress the value, strategic appeal, and strategic flexibility underlying the 17.5 per cent free cash flow yield,” he said.

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