EMERGE Commerce has plenty of optionality, says Raymond James

Raymond James analyst Steven Li likes the new pickup by EMERGE Commerce (EMERGE Commerce Stock Quote, Charts, News, Analysts, Financials TSXV:ECOM) which would essentially double in size with the acquisition of BattlBox. In an update to clients on Monday, Li reviewed the deal and maintained his “Outperform 2” rating for EMERGE, saying valuation multiples in the e-commerce space could re-rate soon. 

Toronto-based EMERGE Commerce focuses on acquiring direct-to-consumer (D2C) brands in the North American market, acquiring companies often working in niche verticals or with unique operations. The company has in its stable of brands the premium meat company truLOCAL, golf experiences and products companies such as JustGolfStuff.ca and coupon and discount company WagJag.com. 

EMERGE announced on Monday a definitive agreement to acquire survival, outdoor and camping goods subscription-based company BattlBox along with its affiliates Carnivore Club and Carnivore Club Subscription Box Canada. The deal was listed at US$10.25 million in cash, US$1.5 million in deferred consideration payable over three years and an earnout consideration of up to US$7.2 million over three years.

EMERGE said in a press release that the acquisition will be immediately accretive to EMERGE’s EBITDA and that BattlBox Group had revenue of about US$23 million for the trailing 12 months ended May 31, 2021, with adjusted EBITDA of about US$3.3 million. The deal is expected to close within 45 days.

“BattlBox Group will be our largest and most profitable acquisition to date and provides us with a very capable and disciplined operating team in the U.S. with deep subscription-based e-commerce expertise,” said EMERGE Founder and CEO Ghassan Halazon in a press release. 

“The acquisition delivers two excellent brands with tremendous growth opportunities. Firstly, BattlBox, a highly profitable, market leader in the fast-growing survival, outdoor gear, and camping subscription space in the U.S., and second, Carnivore Club, a leading premium artisanal, cured meat subscription box, which we view as a complementary offering to truLOCAL, our premium meat subscription business. We see strong potential for cross-selling, and leveraging shared facilities over time,” Halazon said.

Looking at the deal, Li called it a great fit at a great price, saying the amount to be paid is well within EMERGE’s targeted range for multiple paid for acquisitions.

“We like this transaction given the multiple paid, the scale it brings and potential synergies. Battlbox growth exploded with the pandemic and thus far in 2021 sales volume has stayed close to 2x pre-pandemic levels while earn-outs are based on Battlbox continuing to grow organically for the next few years (~15 per cent),” Li said in his report.

Li said EMERGE’s M&A pipeline looks good and the company has enough firepower to deliver a few more tuck-in acquisitions this year, while larger acquisitions would require more capital.

“ECOM continues to advance its growing acquisition pipeline of D2C e-commerce. Noted interest in some new verticals, including pets, health & wellness, beauty and organic food. Post Battlbox, cash balance is at ~$4.3 million. Based on management commentary, they feel comfortable extending their leverage to 3x current EBITDA. This plus the current cash on hand would place M&A firepower at ~$8million,” Li wrote.

Also on Monday, EMERGE released its quarterly financials for the second quarter 2021, showing revenue up 182 per cent year-over-year to $6.8 million and adjusted EBITDA of $0.08 million compared to $0.4 million a year earlier. (All figures in Canadian dollars except where noted otherwise.)

The company saw Gross Merchandise Sales increase to a record $11.5 million for the quarter, up 62 per cent from a year earlier, while EMERGE ended the quarter with $18.9 million in cash on its balance sheet.

“Q2 was another strong quarter for EMERGE despite continued pandemic-driven uncertainty. Overall, we are pleased to report that revenue grew dramatically while generating our sixth consecutive quarter of positive Adjusted EBITDA, despite increased investments in our team and operations,” said Halazon in a press release.

Li noted that the quarter featured a solid performance from truLOCAL which delivered sales volume at about 2x pre-pandemic levels, while EMERGE’s Golf segment saw a rise in equipment and apparel due to the rising popularity of the sport. Golf experience packages, however, were soft due to golf course being fully booked and therefore running fewer promotions.

Looking more widely at the e-commerce space Li said other e-commerce acquirers could soon go public and potentially float all boats in the sector. 

“Amazon aggregators/acquirers like Thrasio (private) have raised significant amount of capital, and these past few months we have seen several news articles regarding Thrasio going public (via SPAC). A go-public transaction in this space could potentially re-rate the valuation multiples for this group,” Li said.

For EMERGE, Li thinks the company will deliver 2021 revenue and EBITDA of $35 million and $2 million, respectively, and 2022 revenue and EBITDA of $60 million and $5 million, respectively.

With his reiterated “Outperform 2” rating, Li has lowered his target from $2.75 to $2.25, saying e-commerce valuations have compressed since Raymond James launched coverage in March of this year. At press time, the new target represented a projected one-year return of 192.2 per cent.

Diclosure: EMERGE is an annual sponsor of Cantech Letter