Converge Technology Solutions Corp CTSDF

TD 2

[retiredcf]

Maintain their $6.00 target. GLTA

Q1/F24: FACING NEAR-TERM CHALLENGES BUT SEEING LIGHT AT THE END OF THE TUNNEL

THE TD COWEN INSIGHT

F2024 guidance implies a strong rebound in organic growth in H2/F24 and much anticipated margin expansion, with further gains expected in F2025 aided by the completion of Phase 1 of its ERP migration (set for October). However, we remain more cautious on the growth outlook and prefer to wait until we see evidence of a sustainable rebound in demand and margins before becoming more constructive.

Impact: NEUTRAL

Relatively more optimistic about a hardware rebound. Based on conversations with its vendors and customers (including the Canadian government), Converge is cautiously optimistic of a gradual rebound in hardware, starting H2/F24. It expects to get further clarity around demand and pricing dynamics in the latter half of Q2. We note this contrasts with close peer Softchoice, who on its Q1/F24 call expressed much less optimism around a recovery in hardware spend later this year, as customers continue to deal with macro challenges (link).

New leverage target revealed. Management indicated that it is now targeting a leverage level of ~1x or less (was ~2x), given the current higher interest rate environment. We note that the 1x leverage target is based on management's calculation, which does not include lease liabilities.

Likely to remain aggressive with its share buyback activity. Given its leverage levels are below its new target of 1x and with FCF expected to remain strong going forward and M&A likely still on hold until at least late F2024/early-F2025, we believe Converge will continue to be aggressive with its share buyback activity, particularly given the 12% pullback in
the stock yesterday. We got clarity that the C$40mm per fiscal year restriction on share buybacks and dividend payments only applies when it exceeds ~2x bank-calculated leverage, which includes lease liabilities, deferred/contingent consideration, and a maximum C$50mm cash component.

Converge has already been very active with its NCIB this year, particularly in the last two months. In Q1, it repurchased ~2.08mm shares for ~C$11.1mm (~C$5.37 VWAP), although most of it was paid and cancelled in Q2 (only ~C$2.3mm was paid in Q1). YTD, it has spent ~C$29mm paying dividends (~C$2mm) and buying back shares. Converge had repurchased ~4.28mm shares until the end of April (~2.1% of basic shares O/S exiting Q1/F24) for ~C$23.4mm (~C$5.47 VWAP). In particular, Converge was very active with its NCIB in April, buying 100k shares every day or 2.2mm shares in total for ~C$12.3mm (VWAP of ~C$5.57/share). Converge started buying 100k shares/day every day on March 8th, just after its Q4 release.