CIBCHave an $8.00 target. GLTA
EQUITY RESEARCH
September 12, 2022 Flash Research
CONVERGE TECHNOLOGY SOLUTIONS
CORP.
To Acquire Newcomp Analytics For $20 Million
Converge announced the C$20.3MM acquisition of Newcomp Analytics for
~6x TTM EBITDA. Headquartered in Toronto, Newcomp Analytics is an IT
consulting provider that enables organizations to gain data-driven insights
through its advanced analytics solutions. The 6x EV/EBITDA multiple is
slightly above Converge’s typical 5x, although we view the multiple as
reasonable given Newcomp’s business mix, which is skewed towards data
analytics and artificial intelligence. Post the transaction, we calculate that
CTS will have net debt of ~$28MM or 0.2x leverage and view the company
as on track to meet its $1B in acquired gross revenue target for 2022.
Key Highlights
Target Overview: Headquartered in Canada, Newcomp focuses on IT
services and consulting for clients across Canada, U.S. and the Caribbean.
The company offers a range solution offerings across AI & machine learning,
data engineering, BI & data visualization, financial planning & analytics, and
the cloud. This acquisition will strengthen the solution offering for Converge’s
North American customers. The company generated revenue of C$36.4MM
and EBITDA of C$3.4MM in the TTM period (9% EBITDA margin). In addition
to the cash purchase price of C$20.3MM, Converge expects to pay out
positive net working capital at transaction close.
On Track To Reach $1B in Acquired Gross Revenue in 2022: With this
acquisition, CTS has acquired ~$965MM in gross revenue YTD, approaching
management’s $1B target. We expect the focus for the remainder of the year
to be on integration, logo growth, and cross-selling. We see Newcomp as
providing an analytics offering that can be cross-sold to its existing client
base.
Cash Position: Post this acquisition, we calculate that Converge will have
net debt of ~$28MM with leverage of 0.2x. However, the transaction is
expected to be immediately accretive and we are forecasting $43MM in free
cash flow for the remainder of the year, suggesting the company will continue
to have room for acquisitions without leveraging up aggressively.