2023 Vision Highlights CTG's Accelerating Transformation; Raising Price Target to $11.00
We met virtually with management of CTG Inc. (CTG) to discuss the company’s 2023 Vision. After reporting a strong finish to its FY ’20 last month, CTG published a new investor presentation highlighting the company’s opportunity to accelerate its clients’ digital transformation initiatives and laying out ambitious targets for FY ’23. These aspirations include increasing solutions revenue to at least $250 million and generating adjusted EBITDA of $35 million. For context, CTG exited FY ’20 with solutions revenue in excess of $140 million and adjusted EBITDA of over $15 million. Management’s 2023 Vision therefore implies a CAGR in solutions revenue of 21% over the next three years with an incremental adjusted EBITDA margin in the high-teens. At present, our estimates through FY ’22 imply a CAGR in solutions revenue of 10% with an incremental adjusted EBITDA margin in the mid-teens. Clearly, management anticipates accelerating CTG’s transformation to a solutions-based business.
Underpinning the company’s transformation is growing demand for digital transformation. To capitalize on the market opportunity, CTG has re-branded its solutions portfolio and expanded its solutions team, hiring several practice leaders with expertise in digital transformation accelerators such as agile development, DevSecOps, Internet of Things (IoT), intelligent automation, cloud migration, and data and analytics. From a branding perspective, CTG has re-oriented its solutions portfolio around three primary value propositions: Business Process Transformation, Technology Transformation and Operations Transformation, each of which leverages the company’s talent, technology partnerships and global delivery network. Of course, management also remains on the hunt for tuck-in acquisitions with the potential to bolster the company’s digital transformation capabilities and expand its footprint in North America.
Management sees several paths towards achieving $250 million in solutions revenue and $35 million in adjusted EBITDA by FY ‘23, although specific breakouts between organic and inorganic contribution have not been shared. In our view, low double-digit organic growth in the solutions business coupled with an average of one acquisition per year contributing say $20 million in revenue would be a plausible scenario given CTG’s acquisition history. In any event, the greater clarity into the anticipated trajectory of CTG’s transformation bodes well for further multiple expansion, and we are raising our price target from $8.75 to $11.00 based on a FY ’21 EV/EBITDA multiple of 8x. Our prior target reflected a FY ’21 EV/EBITDA multiple of 6x. Considering comparable IT service providers boasting double-digit growth and margin profiles trade upwards of 10x forward EBITDA, we see significant upside potential should CTG successfully execute upon its 2023 vision.
Our report with model and disclosures is available here.
Disclosure(s):
K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
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