Reducing Estimates and Price Target to Reflect Potential Impact of COVID-19
We lower our FY ’20 estimates for CTG, Inc. (CTG) and reduce our price target from $8.00 to $6.25 based on a FY ’21 EV/EBITDA multiple of 5x. Our revisions reflect the anticipated near-term impact on CTG’s business from measures enacted across the globe to reduce the spread of coronavirus. We note that our prior price target represented a FY ’20 EV/EBITDA multiple of 8x. Considering the extraordinary circumstances affecting the current year and the compression in multiples across the company’s peer group, we believe looking to the out-year and applying a more conservative multiple to account for the elevated uncertainty is appropriate.
CTG’s key European markets, including Belgium, France, Luxembourg and the U.K., have all instituted lockdowns to reduce the rate of COVID-19 infections, and a number of states in the U.S. have also followed suit. We expect the closure of non-essential businesses to weigh on the company’s IT Staffing business, which generally requires personnel to be physically present at customer locations. Given that services provided by CTG’s IT Solutions segment are typically performed remotely, we believe COVID-19 will have a more muted impact on the higher margin business. As such, adjustments to our model have been confined to the IT Staffing segment and reflect lower revenues in the final two weeks of Q1 and the first month of Q2.
Regarding the margin impact, we believe CTG can mitigate the effect of lost staffing revenue in the U.S. to an extent as hourly employees not on assignment are not compensated. In Europe, labor costs tend to be more rigid but several countries have proposed programs to limit the economic hit to companies and employees affected by coronavirus. For instance, Luxembourg has put forth a measure to reimburse up to 80% of an employee’s cost. As such, we expect the impact on gross profit to be less than the revenue lost, and we suspect incremental investments planned for FY ’20 may also end up more back-end loaded, thereby ensuring TTM adjusted EBITDA remains above the $5.0 million minimum required under an existing credit agreement.
Beyond 1H ’20, our estimates remain unchanged. We recognize that the present uncertainty may well affect CTG’s ability to secure new opportunities. However, we believe the company continues to execute against a solid pipeline, and we remain optimistic that a return to normalcy in the coming months will enable CTG’s financial performance to rebound nicely in 2H ’20 and beyond.
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.”
Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.