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July 11, 2017
Technology – IT Services
Ralph Garcea, MBA, P. Eng | 647.794.1925 | [email protected]
Gianluca Tucci | 647.794.1926 | [email protected]
Pivot Technology Solutions Inc.
Reiterate Top Pick; H2 is Pivot’s Stronger Half
Projected Return: 124%
Event: We are reiterating PTG as one of our two top small cap picks for H217. All figures are in US$ unless otherwise noted.
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 (15-20+ 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.
PTG-TSX: C$2.45
Buy C$5.50 Target
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Pivot Technology Solutions Inc. (PTG-TSX) | July 11, 2017
Page 2 of 5 Ralph Garcea, MBA, P. Eng | 647.794.1925 | [email protected]
Pivot Technology Solutions Inc. – Tear Sheet (PTG-TSX, BUY, $5.50 PT)
Source: Consensus data - FactSet, Historical Data – Company Filings, Forecasts/estimates – Echelon Wealth Partners.
Company Description Consensus Current Return
Rating:
Target: 5.50 124%
Median: 5.50 124%
High: 5.50 124%
Low : 5.50 124%
Buy 1
Hold 0
Sell 0
# of Ratings 1
Financial Summary/Key Metrics 2015 2016 Q117 Q217E Q317E Q417E 2017E 2018E 2019E 2020E
Product Sales 1,315 1,315 291 343 344 392 1,371 1,439 1,511 1,587 Top Inst. Ownership % Held
Service Revenues 160 155 38 41 38 44 162 172 180 190 Stanton Asset Management, Inc.1.0%
Total Revenue 1,489 1,471 330 384 382 437 1,533 1,611 1,691 1,776 Redw ood Asset Management, Inc.0.2%
Growth y/y -1% -1% 3% 5% 10% 4% 5% 5% 5% Law rence Decter Investment Counsel, Inc.0.1%
Consensus
Gross Margin 11.4% 12.0% 10.3% 11.8% 12.0% 12.0% 11.6% 11.8% 11.8% 11.8%
Adjusted EBITDA 31 25 2- 7 10 14 29 45 59 71
Growth y/y -19% -207% -24% 51% 65% 14% 56% 31% 20%
Consensus
Fully Diluted IFRS EPS 0.07 (0.12) (0.10) 0.03 0.08 0.17 0.18 0.52 0.79 1.01
Growth y/y -268% 15% -770% -210% 203% -254% 190% 52% 28%
Consensus
Net Debt 149 158 109 147 143 143 143 127 100 66 Key Statistics Value
CAPEX 6 2 1 1 1 1 3 4 3 2 52 Wk High 2.60
Top Ten Customers 51% 35% 38% 52 Wk Low 1.35
YTD Chg. 43%
Balance Sheet 2015 2016 Q117 Q217E Q317E Q417E 2017E 2018E 2019E 2020E 1 Yr. Chg. 57%
Cash & Equivalents 8 8 8 2 8 9 9 22 44 76 Beta 0.08-
Accounts receivable 266 300 243 283 281 322 322 338 355 373 Market Cap 99
Inventories 83 49 64 74 73 84 84 88 93 97 EV 244
Total Current Assets 387 391 344 388 392 444 444 478 521 575 Shares Outstanding 40
Growth y/y 1% 1% -3% 14% 13% 13% 8% 9% 10% LTM Dividend 0.16
Total Assets 496 496 450 492 493 544 544 574 616 667 Dividend Yield 6.5%
Deferred revenue & customer deposits 34 39 39 11 11 13 13 13 14 15 Valuation 2016 2017E
Accounts payable & accrued liabilities 254 248 254 291 289 331 331 348 366 384 EV/Rev 0.13 0.12
Revolving credit facility 123 139 91 93 95 97 97 93 89 86 EV/EBITDA 7.4 6.5
Total Current Liabilities 445 452 407 419 418 463 463 478 492 508 P/E (16.3) 10.6
Total Liabilities 457 467 426 468 468 513 513 527 542 557
Total Liabilities & Shareholders' Equity496 496 450 492 493 544 544 574 616 667
Comparables Price Target Div Yield
Multiples Analysis 1 Week 1 Month 3 Month YTD 1 Year 2016 2017 2016 2017 2016 2017
PTG-CA 2.45 5.50 6.5% -1% 17% 40% 43% 57% 1,471 1,533 25 29 (0.12) 0.18
TECD 104.76 0.0% 4% 3% 16% 24% 46% 26,235 34,981 387 707 6.36 9.71
CDW 62.36 1.0% 0% 1% 8% 20% 56% 13,982 14,805 1,107 1,168 3.43 3.84
SNX 120.70 0.8% 1% 5% 16% 0% 29% 14,062 15,717 519 634 7.04 8.41
NSIT 40.19 0.0% 1% -6% -3% -1% 57% 5,486 6,438 203 243 2.52 3.08
SCSC 39.65 0.0% -2% 3% 4% -2% 6% 3,540 3,545 117 118 2.71 2.76
Comparables
Multiples Analysis 2016 2017 2016 2017 2016 2017 2016 2017
PTG-CA 185 #N/A #N/A 0.1 0.1 7.4 6.4 #N/A 10.6
TECD 5,349 #N/A #N/A 0.2 0.2 13.8 7.6 16.5 10.8
CDW 13,626 6.8% 6.8% 1.0 0.9 12.3 11.7 18.2 16.3
SNX 5,568 #N/A #N/A 0.4 0.4 10.7 8.8 17.1 14.4
NSIT 1,821 #N/A #N/A 0.3 0.3 9.0 7.5 15.9 13.1
SCSC 1,059 4.0% 10.2% 0.3 0.3 9.0 9.0 14.6 14.4
P/EEV/EBITDAEV/RevFCF YieldEV
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
also offers data centre, management, infrastructure management, systems architecture, technical
services, and procurement/integration services.
Buy
Consensus
Return Rev EBITDA EPS
0.00
0.20
0.40
0.60
0.80
1.00
1.20
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Jul/16 Sep/16 Nov/16 Jan/17 Mar/17 May/17
Vol
ume
(M)
Pric
e (C
$)
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Pivot Technology Solutions Inc. (PTG-TSX) | July 11, 2017
Page 3 of 5 Ralph Garcea, MBA, P. Eng | 647.794.1925 | [email protected]
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 e-mail as the timely receipt of e-mail 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. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in Canadian Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money. Data from various sources were used in the preparation of these documents; the information is believed but in no way warranted to be reliable, accurate and appropriate. Echelon Wealth Partners Inc. employees may buy and sell shares of the companies that are recommended for their own accounts and for the accounts of other clients.
Echelon Wealth Partners compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of Echelon Wealth Partners including, Institutional Equity Sales and Trading, Retail Sales and Corporate and Investment Banking.
Research Dissemination Policy: All final research reports are disseminated to existing and potential clients of Echelon Wealth Partners Inc. simultaneously in electronic form. Hard copies will be disseminated to any client that has requested to be on the distribution list of Echelon Wealth Partners Inc. Clients may also receive Echelon Wealth Partners Inc. research via third party vendors. To receive Echelon Wealth Partners Inc. research reports, please contact your Registered Representative. Reproduction of any research report in whole or in part without permission is prohibited.
Canadian Disclosures: To make further inquiry related to this report, Canadian residents should contact their Echelon Wealth Partners professional representative. To effect any transaction, Canadian residents should contact their Echelon Wealth Partners Investment advisor.
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 2001. 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? Issuer
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
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer? No
Does Echelon Wealth Partners Inc. or the Analyst have any actual material conflicts of interest with the issuer? No
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?
Yes
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?
No
During the last 12 months, has Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer? No
Has the Analyst had an onsite visit with the Issuer within the last 12 months? No
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? No
Has the Analyst received any compensation from the subject company in the past 12 months? No
Is Echelon Wealth Partners Inc. a market maker in the issuer’s securities at the date of this report? No
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Pivot Technology Solutions Inc. (PTG-TSX) | July 11, 2017
Page 4 of 5 Ralph Garcea, MBA, P. Eng | 647.794.1925 | [email protected]
RATING DEFINITIONS
Buy The security represents attractive relative value and is expected to appreciate significantly from the current price over the next 12 month time horizon.
Speculative Buy The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or financial risks that are higher than average.
Hold The security represents fair value and no material appreciation is expected over the next 12-18 month time horizon.
Sell The security represents poor value and is expected to depreciate over the next 12 month time horizon.
Under Review 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.
Tender Echelon Wealth Partners recommends that investors tender to an existing public offer for the securities in the absence of a superior competing offer.
Dropped Coverage 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 Buy Speculative Buy Hold Sell Under Review Restricted Tender
Number of recommendations 42 35 10 0 2 2 3
% of Total (excluding Restricted) 47% 39% 11% 0% 2%
Number of investment banking relationships 11 14 0 0 0 2 0
% of Total (excluding Restricted) 44% 56% 0% 0% 0%
PRICE CHART, RATING & PRICE TARGET HISTORY
Date Target (C$) Rating
21-Feb-17 5.50$ Buy
Coverage initiated: 02/21/2017 Data sourced from FactSet
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
Pivot Technology Solutions (TSX:PTG)
Price Target (C$)
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Pivot Technology Solutions Inc. (PTG-TSX) | July 11, 2017
Page 5 of 5 Ralph Garcea, MBA, P. Eng | 647.794.1925 | [email protected]
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