Converge Technology is a top choice, says Echelon

Ahead of the third quarter results out Converged technology solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS), Echelon Capital Markets analyst Rob Goff lowered his target price on the stock in a Thursday report to clients, while retaining Converge as a top pick with strong organic growth prospects.

IT solutions provider Converge is expected to release its Q3 report after market close on November 8, while Goff is more conservative on the quarterly numbers, keeping its revenue guidance at $617 million but its EBITDA guidance of $39.5 million. Dollar down to $32.2 million (compared to consensus call at $39.9 million). Goff said higher SG&A expenses related to acquisitions were part of the problem, along with a seasonally weaker quarter.

Looking further ahead, Goff also reduced its fourth-quarter revenue to $785.0 million from $801.8 million and its EBITDA to $54.1 million from $61.5 million , while now forecasting 2023 revenue of $3.175 billion, down $164.1 million and EBITDA of $219.1 million, also trimmed by $6.3 million.

“We are taking a conservative stance in part to reflect macropolitical and economic conditions. We have the potential for revenue and therefore EBITDA outperformance as supply chain constraints are removed and the $507 million pipeline of firm contracts becomes booked revenue. We would watch for the pipeline moving towards normalized levels approaching $200 million. We recognize transactions against its pipeline could represent ~10% revenue growth in 2023 if constraints are sufficiently removed,” Goff wrote.

With the revised numbers, Goff has maintained a “speculative buy” rating on CTS while lowering its target from $12.00 to $11.00, which represented a 63 percent one-year projected return at the time of publication. Converge’s stock price has been down for much of 2022, with the stock down about 45 percent year-to-date and about 49 percent over the trailing 12 months.

Goff said his still-optimistic thesis on Converge ties to a projected free cash flow yield of 13 percent in 2023, which he says could provide downside support and “tremendous flexibility” for the company’s active M&A program and share buybacks. Goff said he could even see management introducing a modest dividend in 2023, and predicts that a 5% dividend yield would account for about a third of the company’s free cash flow, leaving the company enough for further acquisitions.

“We are looking for CTS’ proven copy/paste/accrete formula to maintain its cadence in H223 while continuing to refine it, with a focus on vertical specialization and cross-sector service capabilities,” Goff wrote.

“We expect existing organic growth concerns to be positively addressed as double-digit organic sales and profits result following the integration of recent acquisitions and a higher degree of cross-selling through vertical specialization. As supply chain headwinds ease, we see CTS reducing its $475 million backlog and posting strong double-digit organic growth,” he said.

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