Echelon Capital Markets analyst Amr Ezzat is bullish on mdf Commerce (mdf Commerce Stock Quote, Chart, News TSX:MDF), raising his target price to $20.00/share from $18.00/share to project a 166 per cent return while maintaining a “Buy” rating in an update to clients on Tuesday.
Founded in 1996 and headquartered in Longueuil, Quebec, mdf Commerce provides e-commerce and strategic sourcing solutions to private sector businesses and public sector organizations through various platforms, including Orckestra, keCommerce, MERX, InterTrade and BidNet.
Ezzat’s updated analysis comes after mdf officially completed the $259.9 million acquisition of Periscope Intermediate, a solution provider in the eProcurement sector with over 20 years of industry experience. The acquisition was financed through a concurrent private placement and bought deal public offering ($120.5 million), cash on hand ($92.0 million), borrowings on an upsized facility ($50.2 million), and $4.1 million of consideration shares.
“We’re thrilled to officially welcome all of our colleagues from Periscope to the growing mdf commerce family. This transformative milestone effectively positions mdf commerce as a North American leader for public sector eProcurement, with the ability to fully serve the needs of government agencies as they increase their efforts to digitize their procurement processes. Our combined strengths will allow us to accelerate growth within a largely untapped market and capitalize on near-term increases in infrastructure investments” stated Luc Filiatreault, President and CEO of mdf commerce in the company’s August 31 press release.
Ezzat said Periscope is a great addition to mdf.
“mdf commerce’s acquisition of Periscope provides scale, growth, profitability, and visibility. More importantly, it positions the Company as a leader in the North American public eProcurement market, fending off competition for a prized and highly scalable transaction fee model,” Ezzat said. “Strategically, the acquisition adds missing solutions to MDF’s eProcurement product wheel, rendering the Company a fully integrated end-to-end player with cross selling opportunities abound.”
Ezzat also commented in his report on mdf’s recently released financial results for the first quarter of its 2022 fiscal year, headlined by $22.6 million in revenue, which came in just under the Echelon projection of $22.9 million and the consensus estimate of $23 million, though it did come out as a 2.5 per cent sequential improvement and 9.9 per cent year-over-year increase. Ezzat noted that 72.5 per cent of the company’s revenue in the quarter came from monthly recurring revenue.
The company reported a $1.5 million loss in EBITDA, which Ezzat attributed to increased foundational investments in operations, sales and marketing, R&D, and professional services to support large deployment contracts.
In addition to the Periscope purchase, mdf has also raised additional capital of $120.4 million, with $67.8 million coming from a bought deal public offering of subscription receipts and the $52.6 million coming from the private placement of subscription receipts.
The Periscope acquisition has led Ezzat to revise some of his financial metrics, raising revenue projections for 2022 to $121 million from the original $98.8 million projection, a 42.9 per cent year-over-year increase over the reported $84.7 million in revenue for 2021, with another potential 34 per cent year-over increase to $162.2 million projected for 2023 instead of the original $115.3 million projection.
Ezzat has made similar adjustments to his EBITDA projections for mdf, as he now projects $5.8 million in adjusted EBITDA and a 4.8 per cent margin for 2022 instead of the initial $5.2 million estimate with a 5.3 per cent margin. Ezzat’s 2023 forecast sees the company’s EBITDA moving to $18.8 million and a margin of 11.6 per cent instead of $10.6 million and a 9.2 per cent margin.
The company’s valuation data also comes into clearer focus in Ezzat’s updated estimates, with the EV/Sales multiple dropping from 4.5x in 2021 to a projected 3.2x in 2022, followed by a further projected drop to 2.4x in 2023.
After rising from 2020 to 2021, Ezzat’s future EV/EBITDA multiple projections drop slightly to 65.3x in 2022 before dropping steeply to 20.3x in 2023.
With an expectation of approximately $5 million in cost synergies driven by workforce-related initiatives intended to alleviate hiring needs, improved efficiencies through content aggregation and product integration, Ezzat sees great promise in MDF.
“We continue to push MDF as a high-conviction investment idea. The shares currently trade at 2.4x our F2023 sales estimates, a significant (and unjustified) discount to comparable companies. Notably, high visibility Canadian tech peers trade at a median of 6.6x NTM sales. US/European comparables trade at a median of 11.7x NTM sales. Our $20.00/shr target price (up from $18.00/shr) implies a 5.7x revenue multiple and 166.0 per cent upside from current levels,” he said.
At press time, mdf Commerce was trading at $7.71/share on the Toronto Stock Exchange, down four cents from its previous closing of $7.75/share. Overall, mdf’s share price has dropped 35.7 per cent over the course of 2021, falling after reaching a high point of $16.76/share on February 5.
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