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Converge Technology Solutions Corp T.CTS

Alternate Symbol(s):  CTSDF

Converge Technology Solutions Corp. is a services-led, software-enabled, information technology (IT) and cloud solutions provider. Its global approach delivers advanced analytics, artificial intelligence (AI), application modernization, cloud platforms, cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. It supports these solutions with advisory, implementation, and managed services across all IT vendors in the marketplace. Its segments include Converge Hybrid IT Solutions (Converge), and Portage Software-as-a-Solution (SaaS) Solutions. Converge is focused on delivering advanced analytics, application modernization, cloud, cybersecurity, digital infrastructure, digital workplace, and managed services offerings and provision of hardware and software products and solutions to clients across various industries and organizations. SaaS is focused on digital transactions between individuals, businesses, and government organizations.


TSX:CTS - Post by User

Post by retiredcfon Mar 24, 2023 9:11am
386 Views
Post# 35358235

TD

TD

Converge Technology Solutions

(CTS-T) C$4.12

Highlights from Investor Meetings: Looking to Make Amends

Event

Earlier this week, we hosted investor meetings with Chairman Thomas Volk.

Impact: NEUTRAL

Focused on proving that the model works. On paper, Converge's growth-by- acquisition strategy looks compelling. Acquire low-margin hardware VARs for cheap valuations (multiple arbitrage) and significantly increase their EBITDA/margins/FCF generation by leveraging Converge's scale (e.g., volume discounts, rebates, superior supplier payment terms), cross-selling higher-margin software and services, and reducing costs. However, gross and Adjusted EBITDA margins have been flat/down in recent years, while FCF generation has been below expectations, which we believe is mainly attributable to the rapid pace of M&A, some execution issues, and supply-chain challenges. Given the current pause on M&A until at least H2/ F23, Converge will have a few quarters to demonstrate to investors the merits of its strategy through margin expansion and stronger FCF generation, in particular. Should it succeed, we believe there could be a significant re-rating ahead.

Looking to reset expectations. Following consecutive quarterly misses that have helped drive the stock back to multi-year lows reached just before the announcement of the strategic review last November, Converge is looking for a reset, as it seeks to repair its reputation with investors. Part of its plan is to improve its communication with the Street, which we believe will include better disclosure on the various components of its business as well as key operational metrics. Mr. Volk also highlighted that given the current lull in M&A and the uncertainty of timing of future M&A, Converge's F2023 performance would likely be mostly driven by organic means, and thus F2023 forecasts should not factor-in any acquisitions.

Targeting a Portage monetization this year. Converge will start providing segmented disclosure on Portage this quarter (Q1/F23) to help investors analyze the potential (hidden) value of this attractive asset that it hopes to monetize later this year. Our preliminary analysis suggests that the business could be worth ~$70mm to Converge. Mr. Volk stated that net proceeds from the Portage monetization would be used to generate the most shareholder value, including a share buyback.

TD Investment Conclusion

We are maintaining our C$6.50 target price, based on 7.0x our F2024 Adjusted EBITDA estimate.


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