Converge Technology Solutions
(CTS-T) C$10.25
Q4/F21: Expecting Another Wave of M&A (Very) Soon Event
We are updating our estimates and target price following Converge's Q4/F21 results. See here for our initial take.
Impact: NEUTRAL
Expecting a near-term acceleration in M&A activity. On the conference call, management indicated that seven transactions are moving from the LOI stage to close, with three in North America expected to be announced shortly (by month- end) and another four in Europe with target closing dates in Q2/F22. We believe some of the deals could be among Converge's largest to-date, including a potential platform/beach-head acquisition in the U.K. Converge has already completed three acquisitions YTD at a cost of over $75mm; so the seven potential deals outlined could possibly allow Converge to hit its annual target of 6-10 deals (3-5 deals in both North America and Europe) that adds ~$1 billion in annual revenue (~$400mm in North America and ~€400mm in Europe) by mid-2022.
Monitoring the supply chain. Pandemic-driven supply-chain issues continue to persist and could get worse in the near term due to COVID-19-driven lockdowns in China (e.g., Shenzhen, Shanghai) curtailing certain manufacturing activities. The Russian invasion of Ukraine could also strain supply chains and has caused Converge to delay plans for a technical shared services center in Eastern Europe. The supply-chain woes could persist well into H2/22 and possibly into 2023, providing a key headwind to hardware-centric businesses like Converge.
Strengthening the bench. Last week, Converge announced the hiring of John Teltsch as Chief Revenue Officer. Mr. Teltsch has spent several decades at IBM, most recently as GM of Technology Sales for the U.S., Canada, and Latin America. He will work closely with President Greg Berard to help drive stronger revenue and profit growth globally. Converge also expects to announce a new (London-based) CFO shortly.
TD Investment Conclusion
We are reducing our target price to C$12.00 (from C$13.00), based on 10.0x (down from 11.0x) our F2023 Adjusted EBITDA estimate, due to a decline in peer- group valuations. With the shares trading near the high end of its historical valuation range, we remain neutral on the stock, given our view of an elevated (near-term) risk profile from supply-chain issues, M&A, and increased geopolitical tensions in Europe.