Echelon lowers target on Converge Technology

Echelon Capital Markets analyst Rob Goff lowered his target price on Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS) in a Wednesday report to clients, saying the stock remains significantly undervalued compared to its peers.

Converge released its first quarter 2023 financials on Tuesday, reporting gross sales up 43 per cent year-over-year to $965.3 million and gross profit up 57 per cent to $171.6 million. Adjusted EBITDA was up 39 per cent to $41.2 million.

Perhaps the bigger news from the company, however, was an announcement also on Tuesday that it was concluding its strategic review of potential suitors, first announced last November. The press release said none of the proposals investigated by the Special Committee to conduct the review would be in the best interests of the company.

“The Special Committee further recommended that the Board endorse the Company’s continued execution of its business plans as an independent publicly held company under the leadership of its Group Chief Executive Officer Shaun Maine,” Converge said in a statement.

In his comments, Goff said he is disappointed that the Committee was ending the review and that he was lowering his target price on the stock as a result.

“We had hoped that CTS would receive and eventually accept an attractive bid more consistent with a range of $7-9. We felt the relative strength of European and North American peers for the YTD and the breadth of the valuation gap they commanded against CTS would have generated an attractive bid,” Goff said.

“We further anticipated that large PE investors would have been drawn to the CTS FCF yield. Management has not disclosed details other than indicating that its decision followed the receipt of offers it deemed supporting the termination of the review,” he wrote.

On the Q1, Goff said the results exceeded expectations, while looking ahead, the analyst is calling for Converge to take its topline from $2,164.6 million in 2022 to $2,563.7 million in 2023 and to generate adjusted EBITDA of $185.4 million in 2023 compared to $142.9 million in 2022.

On valuation, Goff called CTS shares significantly undervalued at 6.6x 2023 EV/EBITDA and 5.6x 2024 EV/EBITDA, which compares to its US peers at 8.3x and 7.6x, respectively, and its European peers at 9.6x and 7.7x, respectively.

“We continue to stress the value, strategic appeal, and strategic flexibility underlying the 23.4 per cent free cash flow yield,” he said.

In his update, Goff reiterated a “Speculative Buy” rating on CTS while lowering his target price from $9.00 to $7.00, which at press time represented a projected return of 99 per cent.