Shares of Converge Technology Solutions Corp. (CTS-X) hit a record high Wednesday amid a hot technology takeover market and ahead of news of its latest acquisition.
Converge shares surged by as much as 12 per cent to a record $3.77 on the TSX Venture Exchange on the back of major tech industry takeover news including Salesforce.com’s purchase of Slack Technologies Inc. for US$27.7-billion and Lightspeed POS Inc.’s announcement of its second $400-million-plus U.S. acquisition in less than a month.
The stock closed up 6 per cent or 21 cents to $3.57. After markets closed, Converge announced it was buying U.S.-based cloud and software development company Workgroup Connections. Terms were not disclosed.
The consensus 12-month target price for the stock is $4.35, according to S&P Capital IQ.
Converge, which provides cloud, cybersecurity and other tech services, has seen its shares more than double in the past three months and surge 250 per cent over the past year. The company, which is readying to graduate to the Toronto Stock Exchange, recently closed an upsized $46.2-million financing, which it said would be used largely for acquisitions.
Echelon Capital Markets analyst Rob Goff has named Converge one of his top picks for the fourth quarter and recently increased his target to $4.60 from $4.
In a Nov. 29 note, Mr. Goff said the target increase “reflects the prospects of resumed momentum on the acquisition front.” He also cited the company’s debt costs recently being lowered to around 2.5 to 3 per cent, from 8 to 9 per cent and its cash reserves of about $102-million.
Mr. Goff, who has a “speculative buy” on the stock, said Converge has done 13 acquisitions since Oct. 2017 (not including Workgroup) and is “in its strongest position to date as an acquirer.”
He expects both “tuck-in acquisitions and modestly larger targets in North America before the company executes on its stated goal of acquiring in Europe post Brexit.”
Laurentian Bank Securities analyst Ahmad Furaz, who has a “buy” and $4 target price, said in a Nov. 27 note that Converge is focused on expanding its expertise in North America in analytics, hybrid IT and software.
He said the company has a pipeline of about 150 companies that they have reviewed as potential acquisition targets, “so there is a long runway for M&A-led growth.”
Paradigm Capital analyst Daniel Rosenberg increased his target on Converge to $4.50 from $3 on Nov. 10, and maintained his “buy,” recommendation after some of the company’s third-quarter earnings beat expectations.
Converge reported revenue of $189.9-million, up 31.4 per cent from a year earlier, which was below consensus expectations of $218.1-millon. However, it’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $14.6-million beat expectations of $10.9-million.
Mr. Rosenberg said in the note he expects revenue will grow by more than 35 per cent in 2020.
“We believe CTS is aligned with IT spending trends in cloud, and COVID-19 has been a catalyst for further investment in the area,” he wrote, citing the company’s stock ticker.
“CTS has strong strategic partnerships with cloud technology leaders, including VMware, Red Hat, Microsoft Azure, Amazon Web Services, and Google, which highlight its capabilities in serving complex IT networks. These relationships support higher-margin managed service revenue that traditional VARs [value-added resellers] do not realize. With a disciplined approach to capital allocation, CTS has an attractive runway for growth both organically and through M&A activity.”
Bruce Campbell, president and portfolio manager at StoneCastle Investment Management, owns the stock and believes the company will keep up with its M&A activity after recently raising money.
“Valuation on the current numbers isn’t as attractive as it was but looking out a year or two with the growth rate they have had it is still reasonable in the 5 to 7 times forward EBITDA range,” he said in an e-mail.
Converge’s acquisition of Workgroup is the company’s third deal this year.
“The addition of Workgroup Connections marks another boost to Converge’s already considerable array of cloud and software offerings,” said chief executive officer Shaun Maine in a release. Mr. Maine is the top shareholder in the company, with an 8.2-per-cent stake, according to S&P.
“On top of its experience with big players in the current North American market, Workgroup Connections brings skilled resources who collectively hold over 80 certifications from partners who are currently driving innovation in IT – including AWS, IBM, and Microsoft – to our team. The technical and business resources of our newest Converge family member will provide specialized skillsets for our practice areas supporting our Central and Western regions.”
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