Converge ICT Solutions Inc. (CNVRG) became the third company in the Philippines to have its Initial Public Offering (IPO) this year, following the IPO of MerryMart Consumer Corp. (MM) and AREIT Inc. (AREIT).
Converge, a high-speed broadband internet provider in the Philippines, is challenging telco players PLDT Inc. (TEL) and Globe Telecom (GLO) who are also currently the market leaders in the internet service provider (ISP) industry in the country.
Converge (CNVRG) after the IPO
On October 26, 2020, first trading day of Converge (CNVRG) in the PSE, the stock price plunged after the opening bell and closed 9.4% down from its IPO price to close at P15.22 per share.
As of November 6, 2020, at its last traded price of P15.00 per share, CNVRG’s market cap was P112.74 billion — less than half the market cap of competitors PLDT (P289.51 billion) and Globe Telecom (P268.73 billion)
In the first 9 months of 2020, CNVRG booked revenues of P10.7 billion, 67% higher compared to the same period in 2019. Revenues from its Residential business grew 90% to P8.4 billion driven by strong growth in new subscribers, while its Enterprise business grew by 15% to P2.3 billion.
Residential subscribers increased by 446,093 and currently totals 900,531. The company is benefiting from the acceleration in connectivity demand brought about by work-from-home schemes and online classes due to the COVID-19 pandemic.
CNVRG’s Residential business accounts for majority of the company’s total revenues, contributing 79% of total sales.
Is Converge (CNVRG) a good stock to buy?
Here’s the analysis of CNVRG by stock brokerage company Unicapital Securities, as published in stock reports subscription service PinoyInvestor:
“The Philippines’ emerging middle class, attractive demographics and vibrant BPO sector are key economic factors that will support the broadband industry growth. CNVRG plans to capitalize on these opportunities by deepening its penetration in existing coverage areas that have remaining significant potential to increase in customer base (mainly in Luzon), and by expanding into new coverage areas across the country, starting in Cebu City and going to other new markets and submarkets in Visayas and Mindanao.
CNVRG’s growth story is intact, but valuation is pricey even at the IPO price of P16.80 per share. This implies a 34% premium to our Discounted Cash Flow (DCF) fair value Target Price of P12.50 per share. Our 2021 Price-Earnings (P/E) estimate for CNVRG also implies a 16% premium over its regional peers.”
IPO Stock Price of Converge (CNVRG)
The IPO price of Converge, announced on October 9, was P16.80 per share, at the lower end of its previously announced indicative price of P16.50 to 24.00 per share.
CNVRG has secured the approval of the Securities and Exchange Commission (SEC) and the Philippine Stock Exchange (PSE) to sell to the public more than 1.5 billion shares (consisting of 416 million primary shares and 886 million secondary shares), with an overallotment option of 195 million shares.
At its IPO price of P16.80, Converge is set to receive proceeds of more than P29.064 billion.
In terms of market capitalization, at P16.80 price, Converge’s market cap will reach P126.4 billion, trailing the market cap of telco giants PLDT (TEL) with P289.5 billion and Globe Telecom (GLO) with P280.2 billion (valued on October 9, 2020)
Converge IPO Details
Converge’s stock will trade using the ticker code “CNVRG” in the Philippine Stock Exchange (PSE). The start of listing and trading in the PSE is on October 26.
Based on Converge’s IPO prospectus, the offer period will run from October 12 to 16. Under the Local Small Investors (LSI) of the PSE, prospective investors may buy shares of CNVRG during the IPO period up to a maximum of P1 million.
The IPO will provide a windfall for its founder Dennis Uy, who is expected to become a billionaire after the IPO, and Warburg Pincus, a New York-based private equity firm which invested $225 million in Converge ICT last year.
According to the company, around P10 billion of the cash proceeds will be used for CAPEX or capital expenditures to roll out the broadband internet infrastructure in the entire Philippines by 2021. Around P1.1 billion from the proceeds will be used as working capital.
The bulk of the proceeds will come from the sale of secondary shares which means the proceeds will go directly to the owners of the shares selling their stake.
Converge IPO’s joint underwriters are BPI Capital and BDO Capital.
To find out the Target Price for Converge and at what price you should be buying Converge stocks, check out these exclusive IPO analyses and recommendations:
- Special Report #1: IPO Analysis of Converge ICT Solutions (by AP Securities)
- Special Report #2: Converge IPO Analysis (by AB Capital Securities)
- Special Report #3: Converge IPO: Discount or Premium on Fair Value Price? (by Regina Capital)
Company Profile: Converge (CNVRG)
Converge ICT Solutions Inc. (CICT) was founded by Dennis Anthony Uy and incorporated in Pampanga in 2007. Two years later, in 2009, the company received a Congressional franchise for 25 years and started its fixed broadband operations in 2012.
Private equity firm Warburg Pincus invested $225 million in the company last September 2019.
CICT currently offers two technologies:
- (1) Fiber-to-the-Home (FTTH) – a technology that extends fiber using a splitter to the home or business; FTTH can support higher bandwidth, faster upload/download speed, and is said to be more reliable versus HFC.
- (2) Hybrid Fiber Coaxial (HFC) – extends fiber to a node which converts optical signals to electrical signals; HFC signals are sent through copper-core cables, which means slower speed over long distances.
Converge clams to have more than 730,000 broadband subscribers in the Philippines as of June 30, 2020.
Dennis Uy of DITO same as Dennis Uy of Converge?
They may have the same name but they’re not the same person. Dennis Uy, the Chairman and CEO of Udenna Corporation, DITO CME Holdings, and Chelsea Logistics and Infrastructure Holdings Corp., is from Davao while Dennis Uy, Chairman and CEO of Converge ICT Solutions, is from Pampanga.
Udenna Corp. and DITO telco’s Dennis Uy is a close friend of incumbent President Rodrigo Duterte and was listed as a major donor during Pres. Duterte’s campaign in the 2016 Presidential elections. He was born and raised in Davao City and graduated with a degree in Business Management from De La Salle University (DLSU).
Dennis Anthony Uy of Converge, meanwhile, immigrated with his family from China to Pampanga in the Philippines when he was a kid. He graduated with a degree in Electrical Engineering from Holy Angel University, a private Catholic school, in Angeles, Pampanga.
Analysis of Converge (CNVRG) Stock
Based on the analysis of Converge’s IPO offer by PinoyInvestor‘s partner stockbrokers AB Capital Securities and AP Securities, here are three reasons why Converge may be a good stock to buy and to invest in the long run.
1. Converge in hypergrowth phase in growing broadband market in the Philippines
Based on the company’s prospectus, the Philippines has a Total Addressable Market (TAM) of 18.5 million households in the fixed broadband industry. At present, PLDT, Globe Telecom, and Converge combined merely cater to 4.7 million broadband subscribers, or just around 25% of the entire market.
Converge claims to be the “fastest-growing fixed broadband operator” in the country based on the company prospectus, capturing a “59% market share of total new fixed broadband subscriptions” as of the first quarter of 2020.
2. Converge offers more attractive broadband offerings than PLDT and Globe
According to the company, the current market shift to streaming services such as Netflix and use of bandwidth-heavy apps and video conferencing during these times of COVID-19 pandemic will deliver higher margins for Converge.
They also claim to have better product offerings, on a price per Mbps basis, compared to competitors PLDT and Globe Telecom (see table below).
| Entry-Level Plans (P2,000 & below) | Speed (Mbps) | Monthly Subscription |
| PLDT | 10-30 | P1,299-1,899 |
| Globe | 5-25 | P1,299-1,899 |
| Converge | 25 | P1,500 |
| Mid-Tier Plans (P2,000-P4,000) | Speed (Mbps) | Monthly Subscription |
| PLDT | 50-100 | P2,099-3,099 |
| Globe | 50-100 | P2,499-2,899 |
| Converge | 75-150 | P2,500-3,500 |
| Top-Tier Plans (P4,000 & above) | Speed (Mbps) | Monthly Subscription |
| Globe | 500-1,000 | P6,999-P9,499 |
| Converge | 300-500 | P4,500-7,000 |
In 2019, Converge reported P9.1 billion of revenues and P4.6 billion of EBITDA based on their financial statements.
Between 2017 and 2019, revenues grew at a CAGR of 76.3% while the return on invested capital (ROIC) was 19.6% in 2019, according to the company.
3. No burden of legacy business from SMS and voice services
Because the company started as a purely broadband internet provider, it is supposedly not burdened by the legacy businesses (such as SMS and voice call services) of a typical telco such as PLDT or Globe.
In fact, while PLDT and Globe will still have to contend with declining revenues from their voice, SMS, and other legacy services (which they are unable to get out of easily because of their previous infrastructure investments), Converge’s revenues is primarily data- or broadband internet-focused as seen in the chart below, prepared by AP Securities.
As a purely broadband provider, CNVRG is not expected to experience declining revenues or losses from legacy services related to mobile (such as SMS, voice calls, etc.).
The comparative contribution of broadband and other services to total revenues of CNVRG, TEL, and GLO is shown below.
| Broadband's Contribution to Revenue | 2018 | 2019 | 2020E |
|---|---|---|---|
| Converge (CNVRG) | 100.00% | 100.00% | 100.00% |
| Globe (GLO) | 14.00% | 14.59% | 16.07% |
| PLDT (TEL) | 17.48% | 17.60% | 19.04% |
Highlights of Converge’s Financial Statements
Here’s a summary of Converge ICT Solutions’ financial performance taken from its IPO prospectus.
Converge’s Income Statement (Highlights)
| (in PHP Millions) | 2017 | 2018 | 2019 |
|---|---|---|---|
| Revenues | 2,940 | 5,055 | 9,140 |
| Gross Profit | 1,890 | 2,726 | 4,699 |
| Operating Profit | 1,299 | 1,740 | 2,772 |
| Net Profit | 1,231 | 1,242 | 1,905 |
Converge’s Balance Sheet (Highlights)
| (in PHP Millions) | 2017 | 2018 | 2019 |
|---|---|---|---|
| Current Assets | 1,662 | 3,631 | 11,204 |
| Non-Current Assets | 3,372 | 9,025 | 19,956 |
| Total Assets | 5,034 | 12,656 | 31,159 |
| Current Liabilities | 1,358 | 6,609 | 10,161 |
| Non-Current Liabilities | 450 | 1,439 | 8,831 |
| Total Liabilities | 1,808 | 8,048 | 18,992 |
| Total Equity | 3,226 | 4,609 | 12,168 |
Financial Ratios of Converge
| 2017 | 2018 | 2019 | |
|---|---|---|---|
| Gross Profit Margin (%) | 64.29 | 53.93 | 51.41 |
| Operating Profit Margin (%) | 44.17 | 34.42 | 30.33 |
| Net Income Margin (%) | 41.85 | 24.56 | 20.84 |
| Debt-to-Equity Ratio | 0.19 | 0.61 | 0.80 |
| Current Ratio | 1.22 | 0.55 | 1.10 |
| Return on Equity (%) | 47.17 | 31.69 | 22.71 |
| Return on Assets (%) | 31.33 | 14.04 | 8.69 |
Peer Comparison: Converge vs. PLDT and Globe
| Price-Earnings Ratio (PER) | 2018 PER | 2019 PER |
| Globe | 13.98 | 12.40 |
| PLDT | 12.89 | 9.50 |
| Converge | 148.01 | 96.47 |
| Price-to-Book Value (P/B) | 2018 P/B | 2019 P/B |
| Globe | 3.46 | 3.32 |
| PLDT | 2.16 | 1.91 |
| Converge | 39.87 | 15.10 |
| Return on Equity (ROE) | 2018 ROE | 2019 ROE |
| Globe | 25.49% | 27.45% |
| PLDT | 16.84% | 20.11% |
| Converge | 31.69% | 22.71% |
Good to Buy Converge during its IPO?
Is it worth buying Converge stock during its IPO? According to PinoyInvestor’s partner stockbrokers, not necessarily. This will depend on the potential profit calculated from the possible price appreciation of the stock versus its IPO price.
Our partner brokers AB Capital Securities, Regina Capital, and AP Securities have a Target Price for the Converge stock. These stockbrokers recommend that investors should only buy Converge during its IPO if it is priced below the threshold Target Price.
To find out what the Target Price is and at what price you should be buying Converge, read their Premium IPO stock reports below:
- Special Report #1: IPO Analysis of Converge ICT Solutions (by AP Securities)
- Special Report #2: Converge IPO Analysis (by AB Capital Securities)
- Special Report #3: Converge IPO: Discount or Premium on Fair Value Price? (by Regina Capital)
Sources: Converge IPO Prospectus, Philippine Star, Esquire Magazine, Philippine Daily Inquirer, Rappler, AP Securities, AB Capital Securities, Regina Capital
NOTE: This report is published in partnership with PinoyInvestor.com. PinoyInvestor is a Philippine-based stock reports subscription service that provides detailed analysis and recommendations by various stockbrokers on how to profitably trade the Philippine Stock Exchange (PSE). Sign up here to get your free PSE stock reports!
For additional analyses and trading recommendations on the Philippine stock market, check out these useful references from our partner PinoyInvestor:
- PSE Daily Market Outlook
- Weekly Stock Picks and Model Stock Portfolios
- Fundamental Analysis with Stock Price Targets
- Technical Analysis with Stock Price Support and Resistance
Disclaimer: The report above is merely provided for information and should be construed solely as statements of opinion and not statements of fact. The information presented should not be seen as and does not constitute an offer or solicitation to buy any securities. Before making a decision to trade or to invest, you should perform due diligence and practice sound decision-making. Invest only in products and instruments that you understand.