Two Upgrades Converge Technology Solutions Corp.’s $32-million acquisition of Vicom Computer Services highlights its “copy/paste/accrete/repeat formula,” according to Echelon Capital Markets analyst Rob Goff, who sees “strong prospects” for revenue and cost synergies as well as working capital gains.
“The acquisition reestablishes the momentum of larger acquisitions clearly addressing any questions around use of proceeds for CTS’s cash balances of $90-million-plus or $58-million allowing for Vicom,” he said.
Mr. Goff expects a “lasting, positive response” to the deal, which he projects will generate $9-million in 2021 EBITDA. He also sees its acquisition pipeline remaining “robust.”
“Converge’s track record of successfully completing now 15 accretive acquisitions since October 2017 speaks to the existing market opportunities and management’s capabilities,” he said. “We see many companies with profiles like its latest acquisition, Unique Digital (Oct.1/20), where they are challenged to properly service client demands for cloud services and where they lack the scale to realize full vendor savings. We believe the Company stands to build further shareholder value given the positive momentum of cross-selling its product suite for organic growth while key vendor relationships bring efficiencies, referrals, and acquisition candidates. We are bullish towards the Company’s ability to maintain its acquisition and organic growth momentum.”
In response to the deal, Mr. Goff raised his 2021 revenue and EBITDA estimates to $1.2945-billion and $98.8-million, respectively, from $1.1665-billion and $89.8-million, which was already above the consensus projections on the Street.
Keeping a “speculative buy” recommendation for its stock, he hiked his target to $6.25 from $4.90, exceeding the $4.94 average.
After included Converge on the firm’s “Q420 Top Pick Portfolio,” Mr. Goff also said he’s including the stock in the “Q121 Portfolio.”
“We view Converge as a formidable Hybrid IT Services competitor with scale and key vendor relationships empowering a services portfolio focused on higher growth, superior margin IT services,” he said.
“We see the potential for sustained double-digit organic growth from its multi-vendor focus on higher-value growth services such as cloud applications and remote work applications to small- and medium-sized enterprises in key verticals. Scale advantages provide Converge with pro forma cost synergies while its service suite generates incremental revenues by cross-selling across its acquired businesses and prospective acquisitions.”
Meanwhile, Raymond James analyst Steven Li raised his target by a loonie to $5.75 with an “outperform” rating.
Mr. Li said: “With balance sheet concerns all but gone and ROIC starting to break-out, we believe Converge is just getting started and its current discounted valuation spells opportunity. We only factor a baseline level of smaller M&A in our forecasts, so with this larger acquisition of Vicom, we have updated our A-EBITDA forecasts and our target price accordingly. CTS is a 2021 Best Picks.”