CI&T: An Unfairly Penalized Digital Transformation Play (NYSE:CINT)

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CI&T (NYSE:CINT) provides strategy, design, and software engineering services through multidisciplinary teams to drive digital transformation across verticals and geographies. In pursuit of the massive addressable market opportunities available within digital transformation, management has demonstrated a strong track record in tapping into the robust demand environment and leveraging its favorable labor cost base to generate profitable growth. M&A could prove to be a wildcard as well – given inorganic growth is likely not priced into Street estimates, more accretive acquisitions (like the recent addition of Somo Global) add upside optionality to the stock. With valuations also weighed down this year by rising global interest rates and the relative discount to peers remaining wide, I think the post-IPO weakness offers investors a compelling entry point.

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Tapping into High-Growth Digital Transformation Opportunities

The COVID pandemic has materially accelerated the digital technology adoption curve, as clients look to accommodate remote working demands and customer engagement, as well as the secular adoption of cloud computing. Per IDC estimates, the global digital transformation services market is set to reach $958bn by 2024, with the US representing a significant portion of the market. While the LatAm market is coming off a lower base, it is still poised to deliver higher annual growth through 2024. With digital transformation spending becoming a key priority for companies, it could also prove to be particularly resilient through the cycles – these projects are less likely to get cut amid a macro downturn given their mission-critical nature and relative affordability.

CI&T TAM Breakdown

CI&T

With CI&T in a prime position to capitalize on secular digital technology trends, a >20% organic growth potential is well within reach, in my view, assuming it continues to execute ahead of its larger digital pure-play peers. In addition, the company is on track to ramp up its international exposure over time via M&A – as developed markets represent a larger opportunity than Brazil, this should boost growth as well, although margin expansion will depend on how CI&T handles the higher competitive intensity. As long as the company successfully leverages its concentrated delivery strategy (i.e., by retaining the vast majority of staff in a lower cost country), the increased scale should drive lower SG&A expense contribution and, consequently, industry-leading EBITDA margins in the ~25% range.

Growth-Led M&A Strategy to Accelerate Growth and Margins

CINT’s growth strategy is focused on acquiring new clients, with M&A serving as the accelerator for this growth on several fronts, including geographies, verticals, and synergies. The latter is key – the scale benefits from being under the CINT banner could allow acquirees to tap into larger clients through its breadth of service offerings, while gaining exposure to its nearshore capabilities offers efficiency gains. Given that CINT’s model is based on a strategy consulting component (vs. differentiating on engineering or design capabilities), the M&A focus on founder-led companies that complement CINT’s leadership model should allow for a more straightforward integration process. Dextra, for instance, has been fully integrated within CINT only four months post-acquisition, and continued post-integration progress should yield further benefits going forward.

CI&T Dextra Acquisition Overview

CI&T

Margin-wise, attrition will be a key part of the outlook – relative to CINT’s best-in-class ~12% rate, newly acquired companies tend to have higher attrition in the mid to high-teens, bringing consolidated voluntary attrition higher immediately post-acquisition. That said, CINT has a clear playbook to get this lower, including sharing best practices in talent development and retention to bring attrition closer to the low teens target over time. Through incentives (e.g., earn-outs) and a thorough M&A due diligence process, leadership attrition is generally screened beforehand, so this tends to be less of a factor through the integration phase. Other key margin levers include its less price-sensitive positioning within the strategy component of IT consulting and its particularly lean organizational model, both of which should allow for P&L resilience through the cycles.

Kicking Off Global Expansion with Somo

In line with its outlined M&A strategy, CINT has completed its first post-IPO acquisition. The addition of Somo, a UK-based digital-product agency, brings ~GBP25m (equivalent to ~$34m) in revenue and high growth to boot (the company grew 41% YoY in 2021). In aggregate, the company paid ~GBP49m (or ~$67m) for Somo, comprising ~25% in Class A common shares and an earn-out clause of ~GBP9.8m (or ~$13m) dependent on the post-acquisition performance. Relative to Somo’s revenue base, this implies a maximum 2.4x EV/Sales multiple (including the earn-out), which screens reasonably relative to where CINT stock trades. The decision to allocate 25% of the consideration in stock entails minor dilution, but over the long run, the equity/earn-out component should help to align incentives and reduce integration risk.

CI&T Somo Acquisition Overview

CI&T

The transaction is consistent with CINT’s strategic goal to expand its global presence – Somo adds scale to CI&T’s existing EMEA operation, which remains a small portion of CINT revenues. Plus, the company also gains 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’s concentration by diversifying the employee base via the addition of ~300 digital specialists (+5% to the CINT employee count). Execution is key from here, and if successful, the complementary nature of Somo’s capabilities and geographic focus should allow for ample commercial and operational synergies.

An Unfairly Penalized Digital Transformation Play

Overall, the future looks bright for CI&T – the company is on track to deliver a robust double-digit revenue CAGR over the coming years, tapping into the massive addressable market opportunities within the digital transformation space. EBITDA margins should also expand into the mid-20% range as the company optimizes its onshore/offshore operations. Yet, the market seems reluctant to assign much credit to CI&T’s robust growth outlook – the stock has suffered volatility (to the downside) since its IPO last year amid the move higher in interest rates globally. At its current price, CI&T offers investors many ways to win – the stock trades at a significant valuation discount relative to its global peers (Endava (DAVA), EPAM Systems (EPAM), and Globant SA (GLOB)) and offers investors exposure a resilient and profitable growth runway in the global digital transformation market.