CI&T: A Digital Transformation Game Unfairly Penalized (NYSE: CINT)
CI&T (NYSE: CINT) provides software strategy, design, and engineering services through multidisciplinary teams to drive digital transformation across verticals and geographies. In pursuit of the huge addressable market opportunities available under digital transformation, management has demonstrated a strong track record in exploiting the robust demand environment and leveraging its labor cost base. work to generate profitable growth. Mergers and acquisitions could also prove to be a wild card – given that inorganic growth is unlikely to be factored into Street’s estimates, more accretive acquisitions (like the recent addition of Somo Global) add an option upwards to the title. With valuations also weighed down this year by rising global interest rates and the relative discount to peers remaining deep, I believe the post-IPO weakness offers investors an attractive entry point.
Harness high-growth digital transformation opportunities
The COVID pandemic has dramatically accelerated the digital technology adoption curve as customers seek to meet remote work demands and customer engagement, as well as the secular adoption of cloud computing. According to IDC estimates, the global market for digital transformation services is expected to reach $958 billion by 2024, with the United States accounting for a significant share of the market. As the LatAm market emerges from a weaker base, it is still poised to generate higher annual growth through 2024. With digital transformation spending becoming a key priority for businesses, it could also prove particularly resilient through cycles – these projects are less likely to be cut in the midst of a macroeconomic downturn given their critical nature and relatively affordable price.
With CI&T in a prime position to capitalize on secular trends in digital technology, organic growth potential of over 20% is in my view within reach, assuming it continues to execute ahead of its biggest pure digital peers. In addition, the company is on track to increase its international exposure over time through mergers and acquisitions – with developed markets representing a bigger opportunity than Brazil, this should also drive growth, although expanding margins depends on how CI&T handles the higher competitive intensity. As long as the company successfully leverages its concentrated delivery strategy (i.e. retaining the vast majority of staff in one lower-cost country), increasing scale should result in lower G&A contribution and hence industry-leading EBITDA margins in the ~25% range.
Growth-driven M&A strategy to accelerate growth and margins
CINT’s growth strategy is focused on acquiring new customers, with mergers and acquisitions serving to accelerate this growth on multiple fronts, including geographies, verticals and synergies. The latter is key – the scale advantages of being under the CINT banner could allow acquired businesses to tap into larger customers through the breadth of its service offerings, while exposure to its proximity capabilities offers efficiencies. Since CINT’s model is based on a strategy consulting component (rather than differentiating on engineering or design capabilities), the focus on mergers and acquisitions on founder-led businesses that complementing the CINT leadership model should allow for a smoother onboarding process. Dextra, for example, was fully integrated into CINT just four months after the acquisition, and continued progress after the integration should generate further benefits in the future.
When it comes to margins, attrition will be a key part of the outlook – compared to the best CINT rate of around 12%, newly acquired companies tend to have higher attrition in the mid to teens, which increases consolidated voluntary attrition immediately after -acquisition. That said, CINT has a clear playbook for reducing this level, including sharing best practices for talent development and retention to bring attrition closer to the goal of low teenage numbers over time. . Through incentives (e.g., earn-outs) and a thorough M&A due diligence process, leadership attrition is typically considered upfront, which tends to be less of a factor during the integration phase. Other key margin levers include its less price-sensitive positioning within the strategic component of IT consulting and its particularly lean organizational model, both of which should enable P&L resilience across cycles.
Launch of global expansion with Somo
In line with its M&A strategy, CINT completed its first post-IPO acquisition. The addition of Somo, a UK-based digital product agency, brings ~£25m (equivalent to ~$34m) in revenue and strong growth to boot (company grew 41% in year-on-year in 2021). In total, the company paid ~£49m (or ~$67m) for Somo, comprising ~25% in Class A ordinary shares and an earnout clause of ~£9.8m (or ~$13 million) based on post-acquisition performance. . Relative to Somo’s revenue base, this implies a maximum of 2.4x the EV/Sales multiple (including earn-out), which filters reasonably against where CINT shares are trading. The decision to allocate 25% of the equity consideration results in minor dilution, but over the long term, the equity/compensation component should help align incentives and reduce integration risk.
The transaction is in line with CINT’s strategic goal to expand its global presence – Somo adds scale to CI&T’s existing EMEA operation, which remains a small part of CINT’s revenue. Additionally, the company is also gaining expertise in digital products given Somo’s history of working with blue chip European brands such as Audi (OTCPK:AUDVF), Vodafone (VOD) and Virgin Media (VMED) . Finally, it addresses concerns about CINT concentration by diversifying the employee base through the addition of approximately 300 digital specialists (+5% to CINT employee count). Execution is key from here, and if successful, the complementary nature of Somo’s capabilities and geographic focus should enable vast commercial and operational synergies.
A digital transformation game unfairly penalized
Overall, the future looks bright for CI&T – the company is on track to generate a robust double-digit revenue CAGR over the next several years, exploiting the huge addressable market opportunities in the space of digital transformation. EBITDA margins are also expected to reach around 20% as the company optimizes its onshore/offshore operations. Still, the market seems reluctant to give much credit to CI&T’s robust growth outlook – the stock has suffered from (downside) volatility since its IPO last year amid rising interest rates. worldwide interest. At its current price, CI&T offers investors many ways to earn – the stock trades at a significant discount to its global peers (Endava (DAVA), EPAM Systems (EPAM) and Globant SA (GLOB)) and offers provides investors with exposure to resilient and profitable growth track in the global digital transformation market.