Introducing FY '22 Estimates; Raising Price Target from $7.25 to $8.25

We are introducing our FY ’22 estimates for CTG, Inc. (CTG) and raising our price target from $7.25 to $8.25 based on a FY ’21 EV/EBITDA multiple of 6x. Although we typically would have published forecasts for next year a couple quarters ago, the ongoing COVID-19 pandemic delayed the rollout of our projections given the significant uncertainty already present in our near-term estimates. That said, CTG has executed well amid the challenging backdrop, exceeding our expectations through the first three quarters of FY ’20, and the company appears poised to finish the year with adjusted EBITDA and non-GAAP EPS ahead of our pre-pandemic projections. Moreover, the multi-year renewal of a contract with its largest customer and insider buying by several Board members over the past two months add to our confidence in CTG’s prospects for growth and margin expansion going forward.

Our Estimates Versus Consensus

Our estimates for FY ’20 and FY ’21 remain unchanged and are relatively consistent with consensus. For FY ’22, we expect revenue growth to accelerate to the mid-single digit range on sustained double-digit growth in the IT Solutions segment. Although flattish growth in the IT Staffing business will offset the strong growth in IT Solutions to an extent, the increasing mix of higher margin IT Solutions revenue should yield further expansion in gross margin. Thus, even with incremental investments in sales and marketing, we anticipate 100 basis points of expansion in the adjusted EBITDA margin to 5.2% and growth of nearly 40% in non-GAAP EPS. Specifically, our FY ’22 estimates call for revenue of $388.9 million, adjusted EBITDA of $20.4 million and non-GAAP EPS of $0.68.

With the introduction of our FY ‘22 estimates, we are also taking the opportunity to reevaluate our valuation methodology. Recall that we had pared back the multiple afforded to CTG early on in the pandemic to reflect the heightened business risk and dramatic decline in market sentiment. Even as interest rates fell and the market rebounded, we maintained a highly discounted EV/EBITDA multiple of 5x in deriving our price target. Given the relative stabilization in results over the past few quarters and the expansion in multiples across CTG’s peer group, we are increasing our price target by $1.00 to $8.25 based on a FY ’21 EV/EBITDA multiple of 6x, a level consistent with the low-end of comparable IT staffing and services companies.

Our report with model and disclosures is available here.

Disclosure(s):

K. Liu & Company LLC (“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.