Is Converge Technology Solutions a buy? (September 2024)

After a series of marketing meetings with management, Paradigm Capital analyst Daniel Rosenberg has maintained his “Buy” rating on Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS).

“Yesterday, we hosted marketing meetings with Greg Berard, CEO, and Avjit Kamboj, CFO,” the analyst wrote. “The meetings highlighted Converge’s operational updates, capital allocation priorities and longer-term targets. The outlook was positive as leadership continues to see growth in its high-value service areas growing in the double digits. CTS’ end-to-end platform, which offers both “breadth and depth” and is emerging as a key point of differentiation. The company is focused on hiring new sales, as well as exploring nearshoring/offshoring capabilities as it enters its next stage of growth. Internal integration work and a new ERP system are also driving greater efficiencies and supporting profitability. We have seen CTS mature from a small-cap VAR roll-up to a leading provider of IT solutions. With the company expanding margins and growing FCF, we believe shares offer significant value.”

In a research update to clients September 25, Rosenberg maintained his “Buy” rating and price target of $7.25 on CTS, implying a return of 65.5% at the time of publication.

Rosenberg thinks CTS will post Adjusted EBITDA of $182.4-million on revenue of $2.64-billion in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $199.9-million on revenue of $2.77-billion in fiscal 2025.

“We have made minor adjustments to our forecast following the meetings. We utilize a blend of DCF and EBITDA multiple to derive our target price. For our DCF, we use a WACC of 10.00% and a 2% terminal growth rate. We use an 8.0x multiple on our 2025e EBITDA, which results in our blended target price of $7.25. Converge trades at 5.7x 2025e adjusted EBITDA versus peers at 7.2x. We continue to believe higher cash flow generation will continue to drive share performance,” the analyst added.