More ReactionsAside from CIBC who have never been fans of the company (and to a lesser extent National Bank), these revised targets all seem pretty reasonable. GLTA
Following a 23.7-per-cent drop in its share price on Thursday in response to the premarket release of preliminary third-quarter results that were “well” below his expectations, National Bank Financial analyst John Shao now thinks Converge Technology Solutions Corp. is “washed out and further downside risk is limited,” emphasizing the positive impact of its active normal-course issuer bid.
However, he decided to downgrade the Toronto-based IT solutions provider to a “sector perform” recommendation from “outperform” previously based on “limited upside as substantial effort will be required to restore its growth profile.” He added he’s “moving to the sidelines ... while waiting for the macro tailwinds.”
“The culprit of the miss was a challenging macro environment with delayed deals into FQ4 and potentially next year,” said Mr. Shao.
“At the beginning of the year, we were optimistic about CTS with a view that consistent execution, steady organic growth and margin expansion would drive a re-rating to close the valuation gap against peers. That view proved favourable in the first half of the year, with the stock up nearly 50 per cent at one point. That said, what’s different now is the absence of organic growth in the same formula largely due to macro challenges beyond the Company’s control. While we expect some profitability improvements as CTS shifts focus to internal optimization, we also believe that margin expansion alone (without growth tailwinds) won’t be enough to move this name.”
The analyst pointed to three specific macro headwinds facing Converge: delayed project timing; a hardware refreshment cycle “that’s further pushed out” and lower demand for data centre, networking and storage solutions in North America, previously considered a resilient market.
“Of note, some project spending has been pushed into the next quarter and potentially the next fiscal year,” he said. “That said, Converge is still in the first month of FQ4, and thus it’s still unclear how those delayed deals will impact the FQ4 performance. For the same reason, [Thursday’s] preliminary results also cast a shadow on the near-term outlook. As of the time of writing, consensus numbers imply 7-per-cent revenue growth, 3-per-cent gross profit growth and a flat EBITDA margin, all of which will likely see downward revisions in the coming weeks when the Company unveils its FQ4 guidance.”
His target for the company’s shares slid to $4.50 from $6. The average on the Street is $5.59.
Elsewhere, Scotia Capital’s Divya Goyal lowered Converge to “sector perform” from “sector outperform” with a $5 target, down from $8, calling the guidance revision “disappointing” and seeing “limited visibility” on near-term projects.
“This guidance revision comes as a surprise to us given the company alluded to recovery in its North American and UK business during the last earnings call despite ongoing weakness in the end-user device refresh cycle,” she said. “Recall, CTS revised guidance post deconsolidation of Portage CyberTech post Q2 results, which was expected. While end-user hardware weakness has been noted by global VARs like CDW and Insight, infrastructure modernization continues to be a key investment priority for global enterprises, hence we expected CTS to benefit from the related investments. We were disappointed by the company’s lack of visibility of demand pipeline and have updated our estimates in line with revised guidance which indicates slowdown across the 2H/24 for the company. Based on these updated estimates, we are revising our PT to $5/share (using company’s current EV/EBITDA valuation multiple of 5.0 times) and downgrading the stock to Sector Perform.”
Other analysts making target adjustments include:
* Raymond James’ Steven Li to $5.50 from $6.50 with an “outperform” rating.
“The softness in NA came as a surprise to us, given it has been the stronger performer for the past few quarters and will raise credibility questions around future guidance. Based on management commentary, we expect those headwinds to continue into at least 4Q24. Our model is lower as a result,” said Mr. Li.
* Ventum Capital Markets’ Rob Goff to $6.20 from $6.50 with a “buy” rating.
“The steep decrease in Q3/24 guidance will clearly lead to reduced forecasts and lower forecast confidence. While we anticipate the market response presenting an attractive buying window, we see investors waiting for clarity on the outlook for 2025 demand and savings associated with efficiency moves beyond those in our forecasts. We see fundamental value given its EV/EBITDA discount to peers and 25-per-cent 2024 FCF yield,” said Mr. Goff.
* Canaccord Genuity’s Robert Young to $6 from $6.25 with a “speculative buy” rating.
* CIBC’s Stephanie Price to $4 from $5 with a “neutral” rating.