In-line third quarter numbers have left Raymond James analyst Steven Li holding steady on EMERGE Commerce (EMERGE Commerce Stock Quote, Charts, News, Analysts, Financials TSXV:ECOM). In a report to clients on Monday, Li maintained his “Outperform 2” rating and target price of $2.25/share for a projected return of 217 per cent.
Founded in 2016 and headquartered in Toronto, EMERGE Commerce owns and operates online e-commerce marketplaces in Canada and the United States, with its main outlets being WholesalePet.com, truLOCAL.ca, BattlBox.com, UnderPar.com, JustGolfStuff.ca, WagJag.com, Carnivore Club and BeRightBack.ca.
Li’s latest analysis comes after the company reported its Q3 financial results, which Li reported to be in-line with projections. The quarter was headlined by $6.1 million in revenue, representing a 171 per cent year-over-year increase, though it came in slightly below the Raymond James projection of $6.3 million.
“ECOM is actively looking for revenue and cost synergies between portfolio companies,” Li said. “Management noted exploring facility sharing between TruLOCAL and Carnivore with additional cross-selling opportunities between the two meat platforms. TruLOCAL has also made investment in the B2C space, launching a ‘Corporate Gifts’ employee program for business partners, offering gourmet steak box and ‘Surf and Turf’ Box (wild-caught lobster).”
EMERGE has also been able to adapt with changing markets, as the company has been able to direct traffic from Underpar.com, which has been down on account of golf courses being full, to JustGolfStuff.ca, which Li noted has been having a banner year.
“JustGolfStuff did not see any major disruption from supply chain issues given its low dependency on inventory supply from China and inelastic demand from customers (volumes were up despite increased cost) — all good indications of stickiness in ECOM’s verticals,” Li said.
Meanwhile, after six consecutive positive quarters, EMERGE recorded negative adjusted EBITDA of approximately $500,000, a drop from narrowly breaking even last year, and slightly below the $300,000 loss projection from Raymond James.
Li attributed the EBITDA drop to a planned increase in corporate investment in preparation for acquisitions in the upcoming fourth quarter, though management noted that this should normalize for the remainder of the year. The aquisitions of Being Battlbox Group and WholesalePet.com have closed.
The company ended the quarter with $6 million in cash available after acquisitions to be completed in the upcoming quarter, with management expecting additional tuck-in acquisitions in existing verticals. In addition, after using its $25 million credit facility, Li believes EMERGE will also consider extending its debt ceiling, as BattlBox and Wholesalepet.com begin contributing to the company’s adjusted EBITDA.
Meanwhile, after being negative for the majority of 2021 due to working cap cash consumption, the company expects its working capital to normalize in 2022 and improving FCF generation to support future M&A execution.
“Our third quarter continued the trend of triple-digit revenue growth, driven by our acquisition strategy,” said Ghassan Halazon, Founder and CEO of EMERGE in the company’s November 29 press release. “Q3 was a planned investment quarter for EMERGE as we made key investments in team and infrastructure to lay the foundation for our two most profitable acquisitions to date, BattlBox Group and WholesalePet.com, both having subsequently closed in Q4, and in the process, propelling EMERGE comfortably north of $100 million in annual GMS.”
“Based on results to date, Q4 is shaping up to be a special quarter, driven by strong performance from our latest acquisitions, as well as organically, including in golf experiences where we are seeing supply-side headwinds abating,” Halazon added. “We expect to achieve record GMS, revenue and positive Adjusted EBITDA in Q4 2021, and for 2021 overall.”
The updated results have prompted Li to modify some of his financial projections, slightly lowering his 2021 revenue projection from $35 million to $34 million, with the new total still representing a 278 per cent year-over-year increase. Li’s 2022 revenue projection has dropped on a similar path, falling from $65 million to $64 million for a projected year-over-year increase of 88.2 per cent.
From a profitability angle, Li lowered his 2021 projection from a $0.05/share loss to a $0.06/share loss, with the 2022 projection remaining at $0.03/share.
Li has also subtly raised his EV/Revenue multiple projections, increasing the 2020 figure from 10.7x to 11.2x, moving the 2021 projection from 2.8x to 3x, with the 2022 forecast moving from 1.5x to 1.6x.
From an EBITDA perspective, Li has also lowered his expectations slightly, dropping his projection for 2021 from $1.5 million to $1 million, and then dropping from $8 million to a projected $7 million in 2022. Li also introduces EV/EBITDA multiple projections in 2022, raising the forecast from 11.6x to 13.8x; meanwhile, Li also modified the P/E multiple, with the initial projection raised from 19.8x to 27.7x.
Disclosure: EMERGE Commerce is an annual sponsor of Cantech Letter.