Converge technology has upside potential of 151 percent, says Eight Capital

Something is wrong with me Converged technology solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS) but at this point we don’t know exactly what. The Canadian IT and cloud solutions provider announced on Tuesday that it is undergoing a strategic review prompted by expressions of interest from a number of outside companies. Eight Capital analyst Christian Sgro ponders the prospects, saying in a comment on Wednesday that the news is not surprising given the share price’s decline over the past year, although the company appears to be in very good shape.

First of all, the only quote in Converge’s press release was, “Our management team fully concurs with the board’s decision to explore strategic options to maximize shareholder value,” said Shaun Maine, CEO.

Then to Sgro’s thoughts: “We view the announcement as positive and are not overly surprised given the recent pressure on the stock which we believe is unwarranted. We speculate that private equity investors will be interested in these levels given the attractiveness of the company’s cash flow generation profile and potential for margin expansion.”

Converge soared in the first two years of the pandemic, as the stock soared from under a dollar in early 2020 to as high as $12.85 in September 2021. However, it’s been mostly downhill from there, with the current month being a notable low where CTS fell from $7 earlier in the month to even below $4 before being picked up on the strategic review announcement.

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For his part, Sgro said that the stock was likely under pressure due to a recent miss in the third-quarter report combined with a generally weakening macroeconomic environment.

But the analyst has confidence in the name and says its mid-term fundamentals are well insulated with strong software sales expected in the fourth quarter and likely product strength in the first half of 2023.

“We believe that the seasonal strength in the fourth quarter and the normalization of the company’s backlog will deflate the medium-term outlook and make the stock attractive at current prices,” he said.

Valuation wise, Sgro puts Converge in a range of $7.50 to $10.00 after looking at comparable value-added resellers (VARs) and IT service providers averaging around 9x EV/Adj. traded. EBITDA. He estimates that CTS is currently at 5.4x its EV/Adj. is traded. Estimate EBITDA compared to its VAR and ITSP peers at 9.2x and Global Service Providers at 12.1x. With its update, Sgro maintained a “buy” rating on CTS and a target of $10.00, which represented a 151 percent one-year projected return at press time.

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