EMERGE Commerce is a Buy, says Canaccord

Canadian e-commerce name EMERGE Commerce (EMERGE Commerce Stock Quote, Charts, News, Analysts, Financials TSXV:ECOM) gave a sneak peek at its latest quarterly earnings, showing fourth quarter 2021 revenue up over 490 per cent and positive adjusted EBITDA. And the company looks poised to take more steps forward in the year ahead, according to Canaccord Genuity Capital Markets analyst Aravinda Galappatthige who reviewed the numbers in an update to clients on Wednesday. Galappatthige reiterated his “Buy” rating for EMERGE and $1.20 target price, which at the time of publication represented a projected one-year return of 64.4 per cent.

Toronto-based EMERGE is a consolidator within the e-commerce space focusing on acquiring primarily direct-to-consumer brands in a number of verticals including grocery subscription, golf, outdoor gear, family offers and nearby vacation experiences. The company’s portfolio currently includes WholesalePet.com, truLOCAL.ca, BattleBox.com, UnderPar.com, JustGolfStuff.ca, CarnivoreClub.co, WagJag.com and BeRightBack.ca.

EMERGE reported on Wednesday preliminary Q4 2021 results which included an expected $26 million in Gross Merchandise Sales, representing an increase of 213 per cent year-over-year, revenue between $14.2 and $14.8 million, representing an increase of over 491 per cent, and adjusted EBITDA between $1.1 and $1.4 million compared to last year’s $0.1 million. (All figures in Canadian dollars except where noted otherwise.)

The quarter saw EMERGE close on its BattlBox and WholesalePet acquisitions as well as refinance and upsize its credit facility to $25 million.

“Our preliminary Q4 results illustrate the power of our diversified portfolio, albeit a partial view, as both BattlBox Group and WholesalePet.com were acquired during the quarter. Ultimately, we are most proud about the quarterly Adjusted EBITDA figure, which is expected to significantly exceed 2020 results,” said Ghassan Halazon, Founder and CEO of EMERGE.

The quarterly revenue would be ahead of Galappatthige’s estimate at $13.2 million while in line with his EBITDA call at $1.2 million. 

“Given the sizeable acquisitions during the quarter, as well earlier in the year, year-over- year comparisons are less relevant. With that said, we believe the organic picture
is improving due to early signs of a recovery at Underpar, which served as a drag
on returns in recent quarters. In fact, we believe this may have been a factor in the positive variance versus our results as well,” Galappatthige wrote.

The analyst said investors will want to pay attention to upcoming quarters to see how the larger recent acquisitions of Battlbox and WholesalePet (WSP) turn out. EMERGE bought Battlbox along with Carnivore Club in October for US$10.25 million in cash, US$1.5 million in deferred consideration payable over three years and a contingent earnout consideration of up to US$7.2 million over a three-year period. The company then acquired WSP in November for up to US$25 million made up of US$12 million in cash, US$2 million in EMERGE common shares, US$2 million in deferred consideration payable over two years, and contingent earn-out consideration of up to US$9 million over a two-year period.

Commenting on the two deals, Galappatthige wrote, “Given the nature of the business and the long operating history, we feel confident around execution at WSP. Recall WSP added $4.6 million in revenues and $3.5 million in EBITDA to the business. Consequently, the key is tracking the Battlbox/Carnivore Club businesses, given the sizeable $4 million+ contribution to operating EBITDA, of course, recognizing the seasonality involved.”

On meat subscription delivery business truLOCAL, the analyst said growth was moderated somewhat in 2021 but there should be better growth in 2022 with new initiatives coming forth and faster pickup in its new Quebec operations.

“This, together with potential synergistic gains given the recent acquisition of Carnivore Club, which can involve cross-selling as well as facilities and logistics sharing, can lead to more robust growth in F2022,” he said.

“Given the relatively short earnings history of EMERGE, as we look ahead we believe much depends on the company achieving financial expectations in F2022, in particular EBITDA rising toward $7 million,” Galappatthige said. 

“Given the earnings potential of the underlying assets, especially WSP, BattlBox and truLOCAL, we believe this is very much in the cards. Reaching or surpassing expectations would in turn lift the premium offered to the stock for its consolidation strategy, essentially kicking off a virtuous cycle,” he wrote.

The $72-million market cap EMERGE had a negative return of 46 per cent over 2021, with its 52-week range between $0.58 and $1.72 per share. So far in 2022, the stock is up about 23 per cent.

Last week, EMERGE announced the launch of a loyalty rewards program at truLOCAL where customers can earn points towards free goods like bacon or chicken.

“Offering an impeccable all-around customer experience is at the heart of what makes truLOCAL stand out. With the introduction of this loyalty rewards program, we are giving members, both existing and new, yet another reason to shop and stick with truLOCAL,” said Halazon in a press release.

Disclosure: EMERGE Commerce is an annual sponsor of Cantech Letter.