Converge ICT Solutions, Inc.

THU 20 OCT 2022

Looking regain momentum

despite economic headwinds;
upgrading to BUY

HOLD
Churn stabilizes. Following elevated churn rates seen in 2Q22, management said average
monthly churn has stabilized, although it could remain above its historical average of around
1.5% until year-end due to residual effects from the relaxation of the upfront payment
policy and customers giving up their broadband subscriptions due to the impact of high
inflation. On the positive side, new additions from Visayas and Mindanao could help partly TICKER: CNVRG
offset higher churn and provide additional room for growth. Even with the elevated churn
rate, management said that it is confident of growing revenues by 25% this year. FAIR VALUE: 24.60
Prepaid fiber tentatively scheduled for launch by year-end. CNVRG is tentatively CURRENT PRICE: 12.50
scheduling to launch its prepaid fiber business by year-end. Although everything is still fluid, UPSIDE(%): 96.80
management noted that its pre-paid offering will provide unlimited data to subscribers, but
with a limited number of devices that can be connected. The successful launch of CNVRG’s
pre-paid business could provide the company its next leg of growth considering the larger
addressable market that it can serve.
Possible removal from the MSCI index. CNVRG might be removed in the coming MSCI
index rebalancing in November as its free float market capitalization may fail to meet
the financial research firm’s inclusion criteria. Although the block sale of Warbug Pincus’
288.7Mil shares last May, through its affiliate Coherent Cloud, bumped up CNVRG’s free
float from 26% to 30.9%, the steep decline in CNVRG’s share price by roughly 52.8% from
its Php26.5/sh closing price on end-May would still result to a significant drop in its free
float market capitalization.
Upgrading to BUY rating. We are upgrading our rating on CNVRG to BUY with a FV
estimate of Php24.60/sh. Based on its current price, the stock is very cheap, trading at
only 6.5X 2022E EV/EBITDA with an attractive upside of 96.8%. A successful launch of the
prepaid fiber segment could add to its future earnings while its healthy balance sheet
provides broader financing options. However, near term sentiment for the stock is being
negatively affected by concerns on subscriber growth, and its potential removal from the
MSCI index in November. This could lead to the stock’s lackluster performance in the short
term.

FORECAST SUMMARY

Year to December 31 (PhpMil) 2019 2020 2021 2022E 2023E 2024E

Total Revenues 9,139 15,652 26,479 33,215 39,052 44,615
% change y/y 80.8 71.3 69.2 25.4 17.6 14.2
EBITDA 4,609 8,218 14,803 18,600 21,517 24,627
% change y/y 65.0 78.3 80.1 25.7 15.7 14.5
EBITDA margin (%) 50.4 52.5 55.9 56.0 55.1 55.2
Net Income 1,905 3,388 7,158 8,724 9,551 11,404
% change y/y 53.4 77.9 111.3 21.9 9.5 19.4
Net Margin (%) 20.8 21.6 27.0 26.3 24.5 25.6
EPS (Php) 0.270 0.450 0.951 1.191 1.314 1.569
% change y/y -97.3 66.5 111.3 25.3 10.3 19.4

April Tan, CFA

Relative Value
Chief Equity Strategist
P/E (X) 46.2 27.8 13.1 10.5 9.5 8.0
april.tan@colfinancial.com
EV/EBITDA (X) 19.5 11.2 7.2 6.5 5.6 4.6
P/BV (X) 7.2 3.4 2.7 2.4 1.9 1.6 Carlos Matthew De Leon
ROE (%) 15.7 12.2 20.4 23.2 20.4 19.6 Research Analyst
source: CNVRG matthew.deleon@colfinancial.com

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the
COL Financial website as these may be subject to tampering or unauthorized alterations.
 COMPANY UPDATE I CNVRG: LOOKING REGAIN MOMENTUM DESPITE ECONOMIC
HEADWINDS; UPGRADING TO BUY

THU 20 OCT 2022

Churn stabilizes

Following elevated churn rates seen in 2Q22, management said average monthly churn
has stabilized, although it could remain above its historical average of around 1.5% until
year-end due to residual effects from the relaxation of the upfront payment policy and
customers giving up their broadband subscriptions due to the impact of high inflation.
According to management, around 95% of churn could be attributed to the customer’s
inability to pay within the required window.

On the positive side, new additions from Visayas and Mindanao could help partly offset
higher churn and provide additional room for growth as the Luzon market is already
maturing. According to management, around 19.1% of gross new additions during 2Q22
came from the Vis-Min region.

Even with the elevated churn rate, management said that it is confident of growing
revenues by 25% this year. This is in line with COL’s revenue growth forecast for 2022.
Note that for 1H22, revenue grew by 36% y/y.

Prepaid fiber tentatively scheduled for launch by year-end

CNVRG is tentatively scheduling to launch its prepaid fiber business by year-end.

Although everything is still fluid, management noted that its pre-paid offering will
provide unlimited data to subscribers, similar to postpaid service, but with a limited
number of devices that can be connected. Speed might also not be as fast compared
to its post-paid service. Moreover, top ups can only be used for a limited amount of
time, depending on the value of the top-up such as daily, weekly or monthly. CNVRG’s
planned prepaid service is different from GLO’s planned offering which will feature fiber
hotspots in communities such as sari-sari stores. The successful launch of CNVRG’s pre-
paid business could provide the company its next leg of growth considering the larger
addressable market that it can serve.

COL Financial Group, Inc. 2

 COMPANY UPDATE I CNVRG: LOOKING REGAIN MOMENTUM DESPITE ECONOMIC
HEADWINDS; UPGRADING TO BUY

THU 20 OCT 2022

Balance sheet resilient to forex and interest rate

fluctuations

CNVRG’s balance sheet has sufficient hedges against the soaring US dollar and rising
interest rates. Management said that approximately Php9.5Bil of its Php14.1Bil cash and
cash equivalents is denominated in US dollar, providing the company with significant
buffer against rising cost of imported equipment. Moreover, all of its debts are peso-
denominated, while interest rates on less than 5% are floating. This should insulate the
company from significant interest rate and foreign exchange volatility.

Possible removal from the MSCI index

CNVRG might be removed in the coming MSCI index rebalancing in November as its free
float market capitalization may fail to meet the financial research firm’s inclusion criteria.
Although the block sale of Warbug Pincus’ 288.7Mil shares last May, through its affiliate
Coherent Cloud, bumped up CNVRG’s free float from 26% to 30.9%, the steep decline
in CNVRG’s share price by roughly 52.8% from its Php26.5/sh closing price on end-May
would still result to a significant drop in its free float market capitalization.

Note that in September, the Board of Directors approved a Php1.5Bil share buyback
program to demonstrate management’s confidence in the financial soundness of the
company. The program amounts to 1.6% of market capitalization or 120Mil shares. To
date, the amount is yet to be spent.

Upgrading to BUY rating

We are upgrading our rating on CNVRG to BUY with a FV estimate of Php24.60/sh. Based
on its current price, the stock is very cheap, trading at only 6.5X 2022E EV/EBITDA with an
attractive upside of 96.8%. A successful launch of the prepaid fiber segment could add
to its future earnings while its healthy balance sheet provides broader financing options.
However, near term sentiment for the stock is being negatively affected by concerns on
subscriber growth, and its potential removal from the MSCI index in November. This
could lead to the stock’s lackluster performance in the short term.

COL Financial Group, Inc. 3

 COMPANY UPDATE I CNVRG: LOOKING REGAIN MOMENTUM DESPITE ECONOMIC
HEADWINDS; UPGRADING TO BUY

THU 20 OCT 2022

Converge ICT INCOME STATEMENT (IN PHPMIL)

Solutions, Inc. Total Revenues

2019 2020 2021 2022E 2023E
9,139.5 15,652.3 26,478.8 33,214.7 39,051.6 44,614.7
2024E

(CNVRG) % Growth 80.8% 71.3% 69.2% 25.4% 17.6% 14.2%

EBITDA 4,609.3 8,218.4 14,802.8 18,600.2 21,517.4 24,627.3
COMPANY BACKGROUND % Growth 65.0% 78.3% 80.1% 25.7% 15.7% 14.5%
Depreciation (1,666.4) (2,459) (4,085.2) (5,834) (7,343) (8,549)
Converge Information and Communications Interest expense (275.1) (550.3) (485.5) (1,425.8) (1,759.8) (1,254.5)
Technology Solutions, Inc. (CNVRG) is a Other income (expenses) (170.6) (330) (678.8) - - -
pure-play fixed-broadband operator that EBT 2,497.3 4,878.7 9,553.3 11,340.4 12,414.8 14,823.9
% Growth 49.6% 95.4% 95.8% 18.7% 9.5% 19.4%
currently provides fiber-optic broadband
Taxes (592.5) (1,491) (2,395.0) (2,616) (2,864) (3,420)
services. Their fiber network covers over
Net Income 1,904.7 3,388 7,158.3 8,724 9,551 11,404
495 cities and municipalities nationwide, % Growth 53.4% 77.9% 111.3% 21.9% 9.5% 19.4%
serving around 13.5Mil homes or 52.1% of
total households nationwide as of1H22. The BALANCE SHEET (IN PHPMIL)
telco is planning to reach a 55% nationwide 2019 2020 2021 2022E 2023E 2024E
household coverage by 2023. Cash 6,233.0 12,957 8,083.9 5,946 6,715 9,819
Accounts Receivables 2,105.5 2,173 3,032.8 5,460 6,419 7,334
Inventory 963.4 2,031 3,484.9 4,614 5,424 6,197
Other Current Assets 1,551.5 4,109 6,438.7 6,439 6,439 6,439
SERVICE REVENUE BREAKDOWN Total Current Assets 10,853.5 21,271 21,040.3 22,459 24,998 29,788
PPE 15,939.9 28,127 48,341.0 64,224 72,453 76,762
Other Assets 4,366.1 7,314 12,482.8 12,951 13,079 13,034
12% Total Assets 31,159.5 56,712 81,864.0 99,633 110,530 119,584
Accounts Payable 7,175.6 13,253 18,598.4 17,687 20,147 22,824
6% Loans Payable 1,098.3 731 2,999.2 5,568 5,483 4,805
Other Current Liabilities 1,886.6 1,401 5,286.0 5,286 5,286 5,286
Total Current Liabilities 10,160.5 15,385 26,883.6 28,542 30,915 32,915
Retirement Benefits Liability 30.9 123 121.7 122 122 122
Other Liabilities 8,800.3 13,429 19,747.8 33,635 32,608 28,258
Total Liabilities 18,991.7 28,937 46,753.0 62,298 63,645 61,295
Shareholder's Equity 12,167.8 27,775 35,110.6 37,335 46,886 58,290
82%
Total Liabilities and Equity 31,159 56,712 81,864 99,633 110,530 119,584

CASHFLOW STATEMENT (IN PHPMIL)

Residential - FTTH
Residential - FTTH Residential - HFC Enterprise 2019 2020 2021 2022E 2023E 2024E
Residential - HFC Operating CF 1,684.8 7,299 7,648.5 11,517 19,343 22,197
Enterprise EBT 2,497.3 4,879 9,553.2 11,340 12,415 14,824
Non-cash items 2,891.1 4,491 7,651.7 8,921 11,250 12,257
75% Change in working cap (2,847.8) -423 (7,576.4) -6,128 -1,458 -1,464
Income Tax Paid (859.8) (1,683.6) (2,006.8) (2,616.2) (2,864.1) (3,419.9)
Investing CF (7,381.1) (14,507.4) (19,879.3) (22,184.8) (15,701.2) (12,812.4)
PPE (6,770.9) (13,597.5) (18,146.8) (22,184.8) (15,701.2) (12,812.4)
Intangible Assets (510.8) (672.9) (1,102.3) - - -
Other Non-Current Assets (83.0) - - - - -
Financing CF 11,474.0 13,872 7,324.6 8,530 -2,873 -6,282
Issuance of Convertible P/S 7,056.5 4,568 - 0 0 0
Availment of Loans 5,225.2 3,364 8,532.4 17,001 -568 -4,483
Other Non-Current Liabilities (651.7) 6,189 (756.3) -7,926 -1,760 -1,255
Lease Payment (155.9) (249.5) (451.5) (544.6) (544.6) (544.6)
Net Cash Increase in Cash 5,777.8 6,663.0 (4,906.2) (2,137.6) 768.9 3,103.4
Cash (Begin) 476.7 6,233.0 12,957.4 8,083.9 5,946.3 6,715.2
Cash (End) 6,233.0 12,957.4 8,083.9 5,946.3 6,715.2 9,818.6

COL Financial Group, Inc. 4

 COMPANY UPDATE I CNVRG: LOOKING REGAIN MOMENTUM DESPITE ECONOMIC
HEADWINDS; UPGRADING TO BUY

THU 20 OCT 2022

INVESTMENT THESIS: KEY RATIOS

Low penetration rate means ample room 2019 2020 2021 2022E 2023E 2024E
for growth Residential Subs (000) 529.6 1,038.3 1,691.6 1,994.8 2,316.1 2,609.8
Residential ARPU 1,332.9 1,412.1 1,320.0 1,331.1 1,337.5
The Philippines’ fixed and fiber broadband
Enterprise Rev Growth 46.3% 8.6% 10.8% 20.0% 15.0% 10.0%
penetration rates remain very low at an ROE 15.7% 12.2% 20.4% 23.4% 20.4% 19.6%
estimated 15% to 20%, well below those of EBITDA Margin 50.4% 52.5% 55.9% 56.0% 55.1% 55.2%
other Southeast Asian peers. This creates Net Profit Margin 20.8% 21.6% 27.0% 26.3% 24.5% 25.6%
CA/CL (X) 1.1 1.4 0.8 0.8 0.8 0.9
significant room for the industry to grow in Net D/E Ratio (X) 0.1 (0.1) 0.3 0.8 0.6 0.4
the next few years. Interest Cover Ratio (X) 9.9 20.7 9.0 8.1 12.8 16.5
A/E Ratio (X) 2.6 2.0 2.3 2.7 2.4 2.1

Pure play fixed-broaband operator

Unlike other listed telcos, CNVRG is a pure
play on the fast growing fixed-broadband
industry in the country. This enabled the
company to grow revenues and profits by
a CAGR of 70% and 94% from 2019 to 2021
respectively, significantly outpacing the
growth of its peers.
MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
Lists in the PSE 10/06/2020
Received approval of the Fiscal Incentives Review Board for tax incentives on
05/01/2022
rolling out its infrastructure across unserved and underserved municipalities
Converge Cloud fully exists, increasing free float to 34% 2022

Strong balance sheet

Even with its large capex program for 2021
and 2022, CNVRG’s net debt to equity
ratio is projected to peak at only 0.9X as
of end 2022. Its interest coverage ratio is
also expected to stay healthy, dropping to
a very manageable level of 9.6X at its worst.
CNVRG’s strong balance sheet puts it in an
excellent position to expand its capacity,
enabling it to capitalize on the industry’s
attractive growth outlook.

COL Financial Group, Inc. 5

 COMPANY UPDATE I CNVRG: LOOKING REGAIN MOMENTUM DESPITE ECONOMIC
HEADWINDS; UPGRADING TO BUY

THU 20 OCT 2022

Valuation VALUATION ASSUMPTIONS

Methodology Risk premium 6.5%

Risk free rate 5.5%
Beta 0.95
Cost of equity 12%
Cost of debt 5.0%
Tax rate 25.0%
WACC 7.9%
Terminal growth rate 3.0%

Enterprise value 209,869

Less: Net Debt -30,901
Less: Preferred Shares 0
Equity value 178,969
Number of outstanding shares (Mil) 7,266
Equity value per share 24.60

COL Financial Group, Inc. 6

 COMPANY UPDATE I CNVRG: LOOKING REGAIN MOMENTUM DESPITE ECONOMIC
HEADWINDS; UPGRADING TO BUY

THU 20 OCT 2022

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

FIRST VICE PRESIDENT & CHIEF EQUITY STRATEGIST
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

FRANCES ROLFA NICOLAS DENISE JOAQUIN CARLOS MATTHEW DE LEON

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com denise.joaquin@colfinancial.com matthew.deleon@colfinancial.com

CHARMAINE CO
RESEARCH ANALYST
charmaine.co@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

24/F EAST TOWER, TEKTITE TOWERS,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7