Raymond James stays bullish on EMERGE Commerce

Strong quarterly numbers have Raymond James analyst Steven Li staying bullish on Canadian e-commerce name EMERGE Commerce (EMERGE Commerce Stock Quote, Charts, News, Analysts, Financials TSXV:ECOM). In a report on Monday, Li reiterated his “Outperform 2” rating for EMERGE and his $1.00 target price, saying the company’s ability to pick up new brands through M&A is looking good in the current climate.

Toronto-based EMERGE, which is a niche-acquirer and operator of e-commerce brands like JustGolfStuff.ca, WagJag.com, WholesalePet.com, trulocal.ca and BattlBox.com, announced its first quarter 2022 financials on Monday, featuring revenue more than doubling year-over-year. EMERGE hit $15.8 million for a record topline compared to $7.1 million a year ago, while adjusted EBITDA was up a big 297 per cent year-over-year to $1.1 million.

The rising numbers are the result of significant acquisitions over the past year, with founder and CEO Ghassan Halazon saying in a press release, “Q1 2022 marks the Company’s first full quarter with the BattlBox Group and WholesalePet under EMERGE ownership and demonstrates the power and resilience of our diversified platform, even as Q1 is a seasonal quarter for some of our verticals.”

“I am pleased to report that EMERGE eclipsed $30 million in quarterly Gross Merchandise Sales (GMS) for the first time in the company’s history, along with record revenue during the quarter, while delivering 297 per cent growth in Adjusted EBITDA compared to the first quarter of 2021,” Halazon said.

Looking ahead, management said macro-level economic headwinds persist but the company is sticking to its operational priority in 2022 of optimizing profitability and cash flow by focusing on synergies and cost savings. As for upcoming acquisitions, the company had $5.8 million of cash on hand at the end of the first quarter and said that it has signed multiple Letters of Intent (LOIs).

“Our M&A pipeline is currently deeper than at any point in our history, driven by entrepreneurs looking for alternatives to scale in a cost-effective manner,” said Halazon. “With accretive acquisition opportunities at attractive valuations, along with our diversified portfolio of high-quality brands, we believe EMERGE is well positioned to thrive in these times, and unlock our next phase of profitable growth.”

Looking at the first quarter numbers, Li called it a strong start to 2022 for EMERGE, with the $15.8 million in revenue beating the consensus call for $14.3 million while adjusted EBITDA at $1.1 million was also better than Li’s own estimate at $0.9 million.

Li said EMERGE’s organic growth was better than expected, pointing to contributions from TruLocal WholesalePets and its Experiences business with WagJag. On BattlBox, which recently had its Canadian launch, Li noted the impact of supply chain issues in China while the company’s golf equipment and golf experiences assets saw negative organic growth with the Q1 being a seasonally smaller quarter for that business. 

On EMERGE’s acquisition firepower, Li said the company has the $5.8 million in cash on hand versus net debt of $27 million, while its current debt facility has a maturity date of June 29, 2023. Li said the next potential catalyst on ECOM would be around its refinancing and expanding current facilities, potentially at significantly lower rates.

“ECOM is actively working with multiple lenders to refinance and increase its existing debt facilities at lower interest cost and potentially with an additional upsize ~$10–25 million. Recent market conditions have resulted in more attractively-priced M&A opportunities (cheaper prices as well as lower upfront requirements). Management noted that it has multiple signed LOIs (tuck-ins mostly but also potentially larger transactions),” Li wrote.

On a comps basis, Li said ECOM is currently trading at a discount to other e-commerce companies given its small scale. Li’s $1.00 target stems from a 2.0x multiple of his 2023 revenue forecast and at the time of publication represented a projected one-year return of 244.8 per cent.

Li has revised his forecast and now has EMERGE hitting full 2022 revenue of $65 million, up from $64 million previously and up from the $35 million realized in 2021. On EBITDA, the analyst is calling for $7 million in 2022 compared to $1 million in 2021. 2023’s numbers have EMERGE generating EBITDA Of $8 million on a topline of $73 million (previously $72 million).

On valuation, Li’s revised EV/EBITDA is at 9.2x for 2022 and 7.6x for 2023, while EV/Revenue is at 0.9x for 2022 and 0.8x for 2023.

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