Echelon lowers target on Converge Technology Solutions

After seeing its removal from the TSX 300, 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). Goff provided an update to clients on Monday where he reiterated a “Speculative Buy” rating on CTS, saying he still sees underlying fundamental value in the name.

Toronto-headquartered Converge Technology Solutions is a North American IT solutions provider with advanced analytics, cloud, cybersecurity and managed services offerings. On Friday, the S&P Dow Jones Indices announced as part of its quarterly review that Converge has been deleted from its S&P/TSX Composite Index of 300 companies, prior to the open of trading on Monday, June 19. Two other companies were deleted, RB Global in the Industrials space and Canopy Growth Corp in the Health Care space.

Goff said the move will likely impact about nine million shares of CTS and the net impact should further factor in short positions in the market ahead of the stock’s removal.

“While much anticipated, we could see pressure on the shares over the much-speculated removal. We look for CTS to remain active with its NCIB where purchasing ~115K daily would be expected to complete its NCIB share program by the middle of June,” Goff wrote.

Converge terminated last month a strategic review, announced last fall, which saw it look for potential suitors to acquire the company, concluding that no suitable offers were found. Once the review process was finished, the company was able to reactivate its share buy-back program.

On operations, Goff said the previous two quarters showed significant outperformance in bookings for Converge along with improved supply availability, which together resulted in a strong revenue beat in the first quarter at $678.2 million versus the consensus estimate at $636.7 million.

Goff has raised his Q2 forecast, seeing the opportunity for continued strength from the company.

“We continue to see underlying fundamental value in the shares where forecasts balance improved supply-chain conditions with economic caution,” he said.

“We look for pressure around the TSX Index removal and where the NCIB buying completes the program. We would view pressure on the shares as a positive window given our fundamental view. We could see continued demand strength with Q223 results and the announcement of an SIB potentially together with the sale or sell-down of its stake in Portage as positive catalysts,” Goff wrote.

For the upcoming second quarter, Goff is forecasting $641 million in revenue and $42 million in EBITDA, while for the year, he is calling for $2.593 billion in revenue and EBITDA of $173.7 million.

With the update, Goff lowered his target from $7.00 to $6.00, which at press time represented a one-year implied return of 66 per cent.