Pivot Technology Solutions Inc.

Transcription

1 July 11, 2017 Technology IT Services Pivot Technology Solutions Inc. Reiterate Top Pick; H2 is Pivot s Stronger Half PTG-TSX: C$2.45 C$5.50 Target Event: We are reiterating PTG as one of our two top small cap picks for H217. All figures are in US$ unless otherwise noted. Projected Return: 124% Investment Thesis: With $1.5B in revenue and $29M in EBITDA (1.9% margins) expected in 2017, the Company is well-positioned to capitalize on growth in IT spending, with ~70% of revenue from Fortune 100 enterprises. In a very dynamic IT landscape, Pivot has managed to build a strong brand through successful differentiation, based on: (1) its multi-vendor service provider (MVSP) business model; (2) a strong focus on deep customer relationships ( years); (3) having embedded pre-sales engineers; (4) consistent delivery of quality; (5) operational and organizational reliability; and (6) innovation. PTG is well-positioned to pursue sustainable growth of profitability through leveraging its growing brand awareness, realizing integration synergies, expanding its product and service offerings, and pursuing growth in Canada. The recent acquisition of TeraMach provides the initial footprint to grow/acquire in Canada. From a seasonality perspective, the second half is normally Pivot s stronger half of the year; we are modelling 81% of 2017 EBITDA to be generated in Q3 and Q4, as a result of seasonal business patterns and enhanced cost savings driven by a focused management team and board. See our AGM update note here. With a payout ratio of ~25%, cash flows and dividend support are not an issue. Focus Points: A Leading VAR Few Investors have Heard of: With $1.5B in revenue and $29M in EBITDA (~1.9% margins) expected in 2017, the Company is well-positioned to capitalize on growth in IT spending, with ~70% of its revenue from Fortune 100 enterprises. Focused Management Team: With the arrival of new CEO Kevin Shank and new Chairman Wade Dawe, the management team is focused on fixing all the legacy issues, and positioning PTG for the next phase of growth to $2B in revenue over the next few years. Managed Services and Margin Expansion: We see EBITDA margins doubling from 2% to 4% over the next few years as PTG takes its higher-margin Managed Services business from ~11% of revenues today to 30%. The strategic value of Managed Services comes from: (1) closer client relationships driving increased share of IT spend wallet; (2) differentiation from the generic VAR box pusher ; (3) recurring revenue with typical three-year deals that provide better visibility and predictability; and (4) increased gross margins versus just hardware sales. We estimate every 1% increase in EBITDA % adds ~$2 in value to equity holders. Robust Cash Flow Profile: With a capex light model, PTG is positioned to continue paying a dividend, while paying down debt in the near-to-mid-term and looking for more acquisitions longer term. FCFPS in 2016 was $0.53, and we are modelling $0.52 for 2017 and $0.53 for 2018, implying a 2016, 2017, and 2018 FCF yield of 28%, 27%, and 28%, respectively. Secular Tailwinds: The secular trends play to Pivot s strengths: (1) higher IT spending; (2) greater IT complexity and innovation requires specialized expertise; (3) increased IT pressure for always on as platforms move to the cloud and provide more opportunity for Pivot s lifecycle support; and (4) broader IT supply chain rationalization is driving the need for scale. Gianluca Tucci gtucci@echelonpartners.com Page 1 of 5

2 Price (C$) Volume (M) Pivot Technology Solutions Inc. (PTG-TSX) July 11, 2017 Pivot Technology Solutions Inc. Tear Sheet (PTG-TSX, BUY, $5.50 PT) $3.00 $2.50 $2.00 $ Company Description Current Return Pivot Technology Solutions, Inc. provides information technology services. It designs, sells, and supports information technology (IT) solutions w hich include hardw are, maintenance, and support. It Rating: Target: % also offers data centre, management, infrastructure management, systems architecture, technical Median: % services, and procurement/integration services. High: % Low : % $1.00 $0.50 $0.00 Jul/16 Sep/16 v/16 Jan/17 Mar/17 May/ Hold 0 Sell 0 # of Ratings 1 Financial Summary/Key Metrics Q117 Q217E Q317E Q417E 2017E 2018E 2019E 2020E Product Sales 1,315 1, ,371 1,439 1,511 1,587 Top Inst. Ownership % Held Service Revenues Stanton Asset Managemen 1.0% Total Revenue 1,489 1, ,533 1,611 1,691 1,776 Redw ood Asset Managem 0.2% Growth y/y -1% -1% 3% 5% 10% 4% 5% 5% 5% Law rence Decter Investme 0.1% Gross Margin 11.4% 12.0% 10.3% 11.8% 12.0% 12.0% 11.6% 11.8% 11.8% 11.8% Adjusted EBITDA Growth y/y -19% -207% -24% 51% 65% 14% 56% 31% 20% Fully Diluted IFRS EPS 0.07 (0.12) (0.10) Growth y/y -268% 15% -770% -210% 203% -254% 190% 52% 28% Net Debt Key Statistics Value CAPEX Wk High 2.60 Top Ten Customers 51% 35% 38% 52 Wk Low 1.35 YTD Chg. 43% Balance Sheet Q117 Q217E Q317E Q417E 2017E 2018E 2019E 2020E 1 Yr. Chg. 57% Cash & Equivalents Beta Accounts receivable Market Cap 99 Inventories EV 244 Total Current Assets Shares Outstanding 40 Growth y/y 1% 1% -3% 14% 13% 13% 8% 9% 10% LTM Dividend 0.16 Total Assets Dividend Yield 6.5% Deferred revenue & customer deposit Valuation E Accounts payable & accrued liabilitie EV/Rev Revolving credit facility EV/EBITDA Total Current Liabilities P/E (16.3) 10.6 Total Liabilities Total Liabilities & Shareholders' E Comparables Price Target Div Yield Return Rev EBITDA EPS Multiples Analysis 1 Week 1 Month 3 Month YTD 1 Year PTG-CA % -1% 17% 40% 43% 57% 1,471 1, (0.12) 0.18 TECD % 4% 3% 16% 24% 46% 26,235 34, CDW % 0% 1% 8% 20% 56% 13,982 14,805 1,107 1, SNX % 1% 5% 16% 0% 29% 14,062 15, NSIT % 1% -6% -3% -1% 57% 5,486 6, SCSC % -2% 3% 4% -2% 6% 3,540 3, Comparables FCF Yield EV/Rev EV/EBITDA P/E EV Multiples Analysis PTG-CA 185 #N/A #N/A #N/A 10.6 TECD 5,349 #N/A #N/A CDW 13, % 6.8% SNX 5,568 #N/A #N/A NSIT 1,821 #N/A #N/A SCSC 1, % 10.2% Source: data - FactSet, Historical Data Company Filings, Forecasts/estimates Echelon Wealth Partners. Page 2 of 5

3 Important Information and Legal Disclaimers Echelon Wealth Partners Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. Echelon Wealth Partners Inc. cannot accept any trading instructions via as the timely receipt of messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. 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U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. U.K. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. ECHELON WEALTH PARTNERS INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Copyright: This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of Echelon Wealth Partners. ANALYST CERTIFICATION Company: Pivot Technology Solutions Inc. PTG:TSX I, Ralph Garcea, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. IMPORTANT DISCLOSURES Is this an issuer related or industry related publication? Does the Analyst or any member of the Analyst s household have a financial interest in the securities of the subject issuer? If Yes: 1) Is it a long or short position? Yes; and, 2) What type of security is it? Common shares Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? Does Echelon Wealth Partners Inc. and/or one or more entities affiliated with Echelon Wealth Partners Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer? During the last 12 months, has Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer? During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer? Has the Analyst had an onsite visit with the Issuer within the last 12 months? Has the Analyst or any Partner, Director or Officer been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months? Has the Analyst received any compensation from the subject company in the past 12 months? Is Echelon Wealth Partners Inc. a market maker in the issuer s securities at the date of this report? Issuer Yes Page 3 of 5

4 RATING DEFINITIONS Speculative Hold Sell The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time horizon. The security is considered a BUY but in the analyst s opinion possesses certain operational and/or financial risks that are higher than average. The security represents fair value and no material appreciation is expected over the next month time horizon. The security represents poor value and is expected to depreciate over the next 12 month time horizon. Under Review Tender Dropped Coverage While not a rating, this designates the existing rating and/or forecasts are subject to specific review usually due to a material event or share price move. Echelon Wealth Partners recommends that investors tender to an existing public offer for the securities in the absence of a superior competing offer. Applies to former coverage names where a current analyst has dropped coverage. Echelon Wealth Partners will provide notice to investors whenever coverage of an issuer is dropped. RATINGS DISTRIBUTION Recommendation Hierarchy Speculative Hold Sell Under Review Restricted Tender Number of recommendations % of Total (excluding Restricted) 47% 39% 11% 0% 2% Number of investment banking relationships % of Total (excluding Restricted) 44% 56% 0% 0% 0% PRICE CHART, RATING & PRICE TARGET HISTORY $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Pivot Technology Solutions (TSX:PTG) Date Target (C$) Rating 21-Feb-17 $ 5.50 Price Target (C$) Coverage initiated: 02/21/2017 Data sourced from FactSet Page 4 of 5

5 Toronto Wealth Management 1 Adelaide Street East, Suite 2000 Toronto, ON M5C 2V Ottawa Wealth Management 360 Albert Street, Suite 800 Ottawa, ON K1R 7X Victoria Wealth Management 730 View Street, Suite 210 Victoria, BC V8W 3Y Saskatoon Wealth Management First Avenue rth Saskatoon, SK S7K 1X Toronto Capital Markets 130 King Street West, Suite 2500 Toronto, Ontario M5X 2A Calgary Wealth Management 350-7th Avenue SW, 19th Floor Calgary, AB T2P 3N Oakville Wealth Management 1275 rth Service Road, Suite 612 Oakville, ON L6M 3G Tokyo Capital Markets Holland Hills Mori Tower; RoP # Toranomon, Minato-Ku, Tokyo, , Japan Montreal Wealth Management and Capital Markets 1000 De La Gauchetière St. W., Suite 1130 Montréal, QC H3B 4W Vancouver Wealth Management and Capital Markets 1055 Dunsmuir St. Suite 3424; P.O Box Vancouver, BC V7X 1K London Wealth Management 495 Richmond St., Suite 830 London, ON N6A 5A9 V8W 3Y Page 5 of 5