Laurentian Bank Securities analyst Nick Agostino said the latest quarterly results from mdf commerce (mdf commerce Stock Quote, Chart, News TSX:MDF) were disappointing. In an update to clients on September 2, Agostino lowered his target price to $11.00 from $17.00/share while maintaining his “Buy” rating. At press time, the $11.00 target represented a projected one-year return of 42 per cent.
Founded in 1996 and headquartered in Longueuil, Que., mdf commerce offers procurement and publishing solutions targeting governments and private corporations, online marketplaces in many market verticals including automotive, IT/telecom, electronics, wine and spirits and jewelry, as well as SaaS business solutions.
Agostino’s latest analysis comes after mdf commerce officially completed the acquisition of Periscope International. First announced on August 11, the $264 million deal was partially financed by an affiliated bought deal offering of $67.8 million (8.48 million shares at $8.00 per share).
Agostino has taken the Periscope deal as a sign that mdf is being aggressive in its M&A strategy.
“Rarely do we see companies acquire another of a similar scale,” Agostino said. “We believe investors will need a longer-term focus to fully realize the benefits from this sizable deal, given its short-term dilutive nature. Given this, and MDF competing in a highly fragmented strategic sourcing market, we put the onus on MDF to show it can successfully integrate, deliver and unlock value with the combined entity; we however acknowledge the opportune deal timing given the potential passing of the US$1 trillion infrastructure bill in October.”
Agostiino figured the acquisition to be dilutive, as the total purchase price equates to 5.8x pre-synergies and 4.4x including $15 million in sales synergies, both above MDF’s current 2.9x NTM Sales multiple, though it balances out with the 4.5x paid in a similar transaction in Europe earlier this year.
Agostino noted multiple points of interest behind the acquisition, including the potential for significant network expansion, the ability to enhance its current capabilities with an end-to-end solution, the potential to create an innovative and unique transaction-fee solution providing attractive economics, significant cost and revenue synergies, helping to produce an interesting financial profile for the combined company.
The company announced its first quarter results for the 2022 fiscal year on August 11, headlined by $22.6 million in revenue for a 10.2 per cent year-over-year increase, though it came in under the Laurentian estimate of $23.6 million.
Agostino also noted the company’s $1.5 million negative EBITDA, as his expectation was for a positive EBITDA. Agostino attributes the losses to continued foundational investments in operations, S&M, R&D and lower-margin professional services to support large deployment contracts.
On the fiscal first quarter results, mdf CEO Luc Filiatreault said,
“Q1 fiscal 2022 continued many of the positive trends seen throughout fiscal 2021. Our core growth platforms, Strategic Sourcing and ecommerce, both had double digit growth with our ecommerce solutions and US-based Strategic Sourcing achieving 15 per cent and 32 per cent growth respectively, year-over-year. When combined with our legacy platforms, consolidated revenue grew by 10 per cent year-over-year for the first quarter. We continued to win new contracts this quarter and we saw a steady onboarding of public agencies and suppliers for Strategic Sourcing. Our sales pipeline is healthy and gives us confidence that our organic growth will gain momentum in subsequent quarters,” wrote Filiatreault in a press release.
The events have prompted Agostino to revise some of his financial estimates, as he now projects the company’s second quarter revenue to reach $26.7 million instead of the initial $24 million projection, with an expected EBITDA loss of $1.7 million now in play instead of a $360,000 positive adjusted EBITDA.
The revisions carry over to both 2022 and 2023, with Agostino now expecting revenue of $117.7 million for 2022 instead of $96.4 million, which would represent a potential 39 per cent year-over-year increase. Meanwhile, Agostino’s new estimate for 2023 is $148.5 million instead of $109.3 million, with the new estimate representing a 26.2 per cent potential year-over-year increase.
Through the adjusted EBITDA lens, Agostino now expects a loss of $5.2 million for 2022 instead of $2.2 million on the positive side, while he now forecasts 2023 to include $1.2 million in positive EBITDA, down from the initial projection of $10.5 million.
Agostino’s valuation data provides a mixed view of the company’s prospects, with the EV/Sales multiple forecast to drop from 4.4x in 2021 to 3.2x in 2022, then to 2.5x in 2023. With the updated EBITDA projections, the EV/EBITDA multiples also change, having risen from 33.2x in 2020 to 64.9x in 2021 before becoming unavailable for 2022, then returning for 2023 at a projected 306.1x.
“The lower target price reflects a lower core sales run-rate and dilutive nature (higher share count) of the deal,” Agostino said. “The higher multiple reflects revenue synergies and potential higher growth associated with Periscope vs. our current conservative expectations. MDF currently trades at 2.7x pro-forma NTM Sales versus peers at 3.7x, excluding outliers.”
Mdf Commerce’s share price has dropped 34.6 per cent over the course of 2021, falling after reaching a high point of $16.76/share on February 5.
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