HVS 4Q21: Idea for action from Lowell Capital: IT working group
Hidden Value Stocks issue for the fourth quarter ended December 31, 2021, with an interview with Jim Zimmerman and Abigail Zimmerman of Lowell Capital Value Partners. Jim and Abigail discuss their stock idea, Computer Task Group, Inc. (NASDAQ: CTG).
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Core idea: IT Working Group (CTG)
Computer Task Group is an undervalued IT services company in North America, South America, Western Europe, and India. It provides business process solutions, which include strategic advice, data strategy, digital workplace, enterprise platforms, information disclosure, and regulatory and compliance services. The Company also provides IT and other staffing services, including staffing, staffing and volume staffing services. CTG serves the financial services, healthcare, manufacturing and energy industries, as well as technology service providers.
CTG has gradually transformed from a recruiting services company to an IT solutions company with higher margins and more stable performance. Adjusted EBITDA increased from $ 9.5 million in 2018 to $ 12.5 million in 2019 and $ 15 million in 2020. CTG has performed well during the Covid-19 pandemic and its business has demonstrated strong performance. ” strong resilience, as the demands of working from home have led to increased demand for its technology services.
CEO Filip Gyde successfully led the European division of CTG for many years and was appointed CEO in early 2019 and pursued an aggressive program to exit low-margin staffing services and develop solutions services to higher margin and more resilient since its takeover. This is the same strategy Gyde executed in Europe for CTG, which has resulted in profitable growth for nine consecutive years. We believe Gyde has a precise understanding of the specific solution services that are most critical to existing and potential customers and is carefully building a strong and resilient solutions business across CTG. Non-GAAP operating profit and non-GAAP operating margins have steadily improved as IT solutions continue to represent a larger share of CTG’s total revenues. CTG’s European operations currently provide a dominant share of total operating profits, although they only account for around 40% of total revenues. This is due to Gyde’s strategy in Europe which has been carried out there for many years. In addition, CTG is under intense pressure to achieve continued improvements given the aggressive position held by an activist group, which made offers to buy the company in mid-2019 and early 2020.
CTG’s long-term goals include IT solutions revenue of over $ 250 million and Adjusted EBITDA of $ 35 million by 2023. While we are not confident that CTG can meet these ambitious goals, we believe that CTG will aggressively approach it and, therefore, drive shareholder value. CTG has a highly cash-generating business model with limited capital expenditure needs and an “Ft. Knox” with net cash of approximately $ 33 million in the first quarter of 2021, or approximately 20% of market value. total.
CTG shares are currently trading at around $ 8 per share with around 15 million shares outstanding for a market cap of $ 120 million. CTG has a “Ft. Knox” with net cash of approximately $ 31 million as of 9/30/21 for a total enterprise value (EV) of approximately $ 90 million. LTM EBITDA is approximately $ 16 million. LTM free cash flow (FCF) is approximately $ 10 million. CTG is currently trading at around 6x Adjusted EBITDA and an FCF unleveraged return of 10%.
CTG’s strategy is to grow its IT solutions business to $ 250 million in revenue by 2023. As shown below, IT solutions are growing and becoming a more important part of the overall business of CTG because CTG is simultaneously exiting a less profitable IT staffing business. CTG owns or leases a total of 25 facilities around the world, including North America, Europe, South America and India.
CTG increased its EBIT from $ 6 million in 2017 to $ 11 million in 2020. Adjusted EBITDA increased from $ 8 million in 2017 to approximately $ 16 million for the LTM ended 03/31/21. We believe Adjusted EBITDA can increase significantly by 2023 to reach $ 25 million or more through modest organic revenue growth, improved margins through increased focus on IT solutions and strategic and focused acquisitions. to add the services and geographies required by customers. CTG recently made three small acquisitions, one in 2018, 2019 and 2020, and these have helped drive growth.