{"id":330283,"date":"2024-11-07T00:49:17","date_gmt":"2024-11-06T16:49:17","guid":{"rendered":"https:\/\/www.pinoyinvestor.com\/smartinvestor\/?p=330283"},"modified":"2024-11-07T00:49:21","modified_gmt":"2024-11-06T16:49:21","slug":"stock-in-focus-converge-ict-cnvrg-7-nov-2024-by-ap-securities","status":"publish","type":"post","link":"https:\/\/www.pinoyinvestor.com\/smartinvestor\/stock-in-focus-converge-ict-cnvrg-7-nov-2024-by-ap-securities\/","title":{"rendered":"Stock in Focus: Converge ICT (CNVRG) – 7 Nov 2024 by AP Securities"},"content":{"rendered":"\n

Summary of Broker’s Recommendation<\/h2>\n\n\n\n
Stock Code<\/strong><\/td>CNVRG<\/td><\/tr>
Company Name<\/strong><\/td>Converge ICT Solutions Inc.<\/td><\/tr>
Broker<\/strong><\/td>AP Securities<\/td><\/tr>
Opinion Issued on<\/strong><\/td>7 Nov 2024<\/td><\/tr>
Recommendation<\/strong><\/td>Buy<\/td><\/tr>
1-Year Target Price<\/strong><\/td>PHP 20.58<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
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CNVRG is a big fish in a small pond and can remain big in a bigger pond on the back of its dominance and pure fiber optic products. We believe that CNVRG will gradually capture a larger portion of the market with the newer brands, BIDA Fiber & S2S, alongside attractive pricing and add-on services for existing brands. <\/p>\n\n\n\n

As such, we have a BUY rating on CNVRG and a Discounted Cash Flow (DCF)-based Target Price of P20.58 per share. Its current market capitalization of P111.76-Billion is less than 36% of the market cap of its competitors, which we believe is incongruent with its market share. <\/p>\n\n\n\n

Our BUY rating is further bolstered by CNVRG\u2019s cheap valuation, as it is currently trading at a 2025 Price-Earnings (P\/E) ratio of 9.9x and 2025 EV\/EBITDA of 5.3x. Both ratios are lower than its competitors and CNVRG\u2019s own 5-year historical average.<\/p>\n\n\n\n

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Analysis and Opinion<\/h2>\n\n\n\n

Beyond connectivity<\/strong><\/p>\n\n\n\n

CNVRG is primarily a pure-play fixed broadband provider in the Philippines. The company\u2019s laser focus on fiber services has allowed them offer high-speed fiber-based broadband services at competitive price points, which helped CNVRG to nearly double its market share from 17.08% in 2019 to 32.61% in 2023. <\/p>\n\n\n\n

The telco is also expanding as a content provider via tie-ups with streaming services, a growing industry in the Philippines. The majority of CNVRG\u2019s revenues comes from
the Residential segment, but the company also has a significant Enterprise segment which offers customizable value-added services. These value-added services include private data network solutions, cloud and colocation services, and other connectivity solutions.<\/p>\n\n\n\n

Residential revenue growth boosted by new products<\/strong><\/p>\n\n\n\n

CNVRG management stated that they decided to launch Surf2Sawa (S2S) in 2022 and BIDA Fiber in 2023 in response to surging inflation. According to the company, rather than losing their customers entirely due to unaffordability concerns with FiberX, they can instead offer the option for subscribers to downgrade their plans to the two new brands. BIDA Fiber and S2S targets an underserved market which could have more growth potential; thus, it serves as the new growth avenues for the company while FiberX continues to contribute the bulk of CNVRG\u2019s revenues.<\/p>\n\n\n\n

CNVRG stated that its new products aim to target 17 million untapped households that is 77% of the overall market for fixed broadband. BIDA Fiber and S2S are priced at P888 and P700 per month, well below the P1,000\/month that company charges for FiberX. As the market slowly accepts the introduction of these new products, CNVRG aims to capture a significant portion of the market for budget\/prepaid fiber. <\/p>\n\n\n\n

As a result, we forecast that BIDA Fiber and S2S could take up 15% and 9% of the residential segment subscriber count by 2025. Aside from the first wave of subscribers switching to the lower-priced products, we expect little to no cannibalization of FiberX subscribers moving forward as they target different markets. Instead, BIDA and S2S will allow CNVRG to tap a market that otherwise would not be an addressable segment and could be an attractive introductory product for first-time subscribers thanks to its competitive pricing.<\/p>\n\n\n\n

New products deliver growth, but FiberX is still king<\/strong><\/p>\n\n\n\n

As for CNVRG\u2019s flagship product, FiberX, revenue growth has started to normalize after surging by 69-71% in 2020-221, and we expect revenue growth to stabilize around 5-8% in future years. This could indicate that FiberX is starting to become a mature business segment and has little room for more explosive growth. <\/p>\n\n\n\n

As mentioned, FiberX will still maintain its position as the largest business segment in terms of both revenues and subscriber count, but the additional growth boost from BIDA and S2S could help CNVRG attain its goal of a consistent 7-8% full year revenue growth or even exceed it.<\/p>\n\n\n\n

All eyes on MSMEs<\/strong><\/p>\n\n\n\n

The Department of Trade and Industry (DTI) has partnered with CNVRG to connect MSMEs to their fiber broadband and technology services in September 2024. Under the collaboration, CNVRG will leverage its extensive fiber optic network to provide local MSMEs with high-speed internet connectivity, as well as develop and offer cost-effective products and services designed for small businesses. According to the DTI, MSMEs make up 99.5% of establishments, which opens up a long runway of potential new subscribers for CNVRG.<\/p>\n\n\n\n

Reaching for the SKY<\/strong><\/p>\n\n\n\n

CNVRG has also partnered with Sky Cable Corp. with the aim of upgrading SKY\u2019s internet service by utilizing the pure fiber network of CNVRG. According to management, SKY will become a wholesale enterprise customer of CNVRG and Sky will gradually migrate its 250,000-300,000 subscribers to the CNVRG fiber network.<\/p>\n\n\n\n

Enterprise segment remains strong<\/strong><\/p>\n\n\n\n

We expect that the collaboration with DTI would sustain the strong growth of CNRVG\u2019s SME sub-segment, albeit at a slightly slower pace of 22-25% in the next two years vs its average annual growth of 53% from 2021 to 2023. We still see the enterprise and corporate sub-segment contributing the majority of enterprise
revenues in the next five years, but SMEs will likely be the main growth driver. Adding to that the potential revenues from the SKY partnership, and CNVRG has the perfect recipe for sustaining growth in its Enterprise segment.<\/p>\n\n\n\n

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Check how many brokers recommend this stock<\/h2>\n\n\n\n
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All Stock Rankings<\/a><\/blockquote>