TDStill being cautious, however, I fully expect them to raise their target before the end of the week. GLTA
Converge Technology Solutions
(CTS-T) C$4.14
Prelim. Q4 GP/Adj. EBITDA in-line; Sharp Cash Flow Improvement
Event
Yesterday, after market close, Converge provided a business update ahead of its
Q4/F23 results, which will be released before market open on Wednesday, March 6.
Impact: POSITIVE
Our take. With Converge expecting Q4/F23 gross profit and Adjusted EBITDA to be
in line with guidance/consensus, we believe focus will be on the second consecutive
strong quarter of operating cash flow that is expected to be significantly higher than
anticipated, driven in particular by improved inventory management.
We believe improved cash flow from better inventory management could be
sustainable, especially relative to the large $84mm payables tailwind last quarter.
However, there could be a negative impact on future revenue/gross profit if the lower
inventory levels are insufficient to meet customer demand/timelines, particularly if
supply chains deteriorate (e.g., Middle East conflict).
Although we view the strong H2/F23 non-cash working-capital performance
positively, we note that it still does not completely offset the weak performances
since F2021. In addition, we believe future improvements in receivables collections,
expected to begin in mid-F2024, could be offset by lower DPOs, thus limiting future
gains.
Strong cash flow improvement expected in Q4/F23. Since rejoining Converge
last May, CFO Avjit Kamboj has focused on improving its working-capital position
that has led to strong operating cash flow performances in H2/F23. Converge now
expects cash from operations in Q4/F23 to be stronger than previously indicated:
Operating cash flow of $109mm-$116mm, well above our $38.3mm estimate.
Net debt (excluding lease liabilities) of $209.8mm, down ~$98mm q/q. Including
estimated lease liabilities, we calculate leverage levels falling to ~1.5x from 2.1x
in Q3/F23.
On the better inventory management, Converge indicated that strict inventory
controls introduced by Mr. Kamboj alongside winding down of high inventory levels
(as supply chains normalize), have played a key role in improving inventory levels.
We understand that management does not anticipate a return to recent (elevated)
inventory levels going forward, unless a strategic decision has been made to do so.
Gross profit and Adjusted EBITDA guidance maintained. Converge expects Q4/
F23 gross profit ($177mm-$184mm guidance; ~$180mm consensus) and Adjusted
EBITDA ($45mm-$47mm guidance; ~$45.7mm consensus) to be in line with
guidance and consensus.