mdf commerce has a 142 per cent upside, says Laurentian Bank

It’s been a long trip down for mdf commerce (mdf commerce Stock Quote, Charts, News, Analysts, Financials TSX:MDF), whose share price has lost over 70 per cent of its value over the past 12 months, but heading into the e-commerce company’s quarterly results analyst Nick Agostino of Laurentian Bank Securities sees lots to be positive about in the company. In an update to clients on Monday, Agostino reiterated his “Buy” rating and $11.00 target price on MDF, saying that while supply chain issues will continue to dog e-commerce sales, the company’s e-procurement pipeline looks strong.

Montreal-based mdf commerce is a software solutions and services business with segments in Unified Commerce, e-marketplace and e-procurement. The company offers procurement and publishing solutions to governments and private corporations, online marketplaces for a number of industry verticals and SaaS-based business solutions.

Lining up the company, Agostino said supply chain woes were a feature of its most-recent quarter, the company’s fiscal Q2 2022, with e-commerce sales being impacted particularly in Europe. And the analyst predicts more of the same in the fiscal Q3, due on February 9 after market close, with the pandemic still playing a major role. The analyst pointed to grocery chain Metro which recently cited cost inflationary pressures, labour shortages and supply chain challenges which impacted online food sales, which remained relatively flat year-over-year. 

Similar elements are in the cards for mdf in its Unified Commerce segment, Agostino said, which represents about 40 per cent of the company’s sales.

“We expect Supply Chain collaboration revenues to recover slowly in light of depressed transaction and volume-based revenues, although MDF did announce a partnership with Traverse Systems during FQ3, which should boost its InterTrade platform through greater market reach,” Agostino wrote.

On the e-procurement side, Agostino said mdf recorded year-over-year growth of 40.1 per cent in its fiscal Q2 2022 compared to 32.3 per cent growth in the fiscal Q1, with the focus on recent acquisition Periscope being a key factor.

“We believe Periscope’s scalable transaction-fee based model (as of FQ2 MDF in discussion with about eight states to extend solution coverage; City of Long Beach onboarded in Oct.), combined with organic growth from BidNet and the passing of the US$1.2T Infrastructure Bill provide encouraging tailwinds, however Periscope’s contribution will be key in determining segment performance,” Agostino wrote.

As for the upcoming third quarter, Agostino is calling for $32.9 million in sales (lowered by eight per cent from his previous estimate) and adjusted EBITDA of $0.2 million. Overall organic growth excluding foreign exchange was placed at about 13 per cent compared to about nine per cent for the previous quarter, as Agostino sees continued uptake in mdf’s Strategic Sourcing solutions.

Agostino said cost pressures are still a factor for the company, coming from: mdf’s investments in operations, S&M and R&D; elevated lower-margin Professional Services segment to support large deployment contracts; higher year-over-year G&A on market competitive salary increases to counter the tech talent crunch; and increased opex.

“We believe these will be offset by: 1) management protecting its future GM by introducing new pricing strategies (engaging with clients to ensure minimal pushback); 2) cross-selling efforts with Periscope; 3) early benefits from the company’s focus on growing its existing office in the Ukraine to expand its software engineering workforce to counter the wage increases in North America; and, 4) growing EBITDA contributions from Orckestra. We continue to expect the B2C e-marketplaces (~15 per cent of sales) to be a declining contributor to the company’s overall performance as cash flow generation from these platforms is used to support Unified Commerce and e-Procurement,” Agostino wrote.

Looking ahead, Agostino has a number of points on which investors can focus, including: mdf’s ongoing Periscope integration; the potential for further M&A tuck-ins, especially in e-procurement; the ongoing impact of the IT talent crunch; any updates on the retail market supply chain given pandemic and supply chain headwinds; client wins from mdf’s partnerships; growth contributions and prospects from e-commerce and e-procurement; customer adoption rates at Aldi and any progress on on-boarding the remaining grocery stores; and a status update on mdf’s NHS London Procurement partnership.

“MDF currently trades at 2.3x C2022 Sales versus its peers at 4.2x, despite a similar sales growth profile (MDF C2022 sales growth at 26 per cent versus peers at 23 per cent),” Agostino said.

At press time, Agostino’s $11.00 target represented a projected one-year return of 146.1 per cent. Looking ahead, the analyst is calling for mdf commerce to generate full fiscal 2022 sales and adjusted EBITDA of $114.8 million and negative $2.0 million, respectively, and fiscal 2023 sales and adjusted EBITDA of $142.2 million and $2.0 million, respectively.