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Buy MDF Commerce at dirt cheap prices, this portfolio manager says

The stock is down by over 70 per cent this year and that’s way too much for a company with tons of growth ahead and catalysts around the corner. That’s the scoop from Stephen Takacsy of Lester Asset Management, who just gave a Top Pick recommendation to Canadian software and services company mdf commerce (mdf commerce Stock Quote, Charts, News, Analysts, Financials TSX:MDF).

Montreal-based mdf, formerly Mediagrif Interactive, has SaaS-based solutions which in broad-based terms enable commerce to flow between buyers and sellers. In particular, mdf focuses on Unified Commerce, e-marketplace and e-procurement and has clients in both the public and private sectors across a number of industry verticals. mdf lists companies like Sobeys, IGA, Dollarama and UK-based food retailing giant Aldi as clients for whom mdf supports their transactional infrastructure where, for example, in the case of Aldi mdf develops the company’s click and collect platform.

On the procurement side, mdf has platforms for public sector clients that enable suppliers to bid on government contracts, and it’s in this sphere that Takacsy says mdf really shines, although there have been some growing pains along the way.

“mdf is consolidating [the e-procurement] industry in the US. They made a transformational acquisition last year of Periscope to become the number one player in the US,” said Takacsy, CEO of Lester Asset Management, who named mdf commerce one of his three top picks for the next 12 months on a BNN Bloomberg segment on Thursday. “But that acquisition was large and it acquired a large amount of equity which caused the stock to become very depressed.”

“And more recently, IT labour shortages which we’ve heard a lot about and COVID restrictions have delayed some deployments, which has hurt their financial results,” he said.

The company released its fourth quarter fiscal 2022 results a few weeks ago, showing Q4 revenue up 36 per cent to $22.0 million while full fiscal 2022 revenue was up 28 per cent to $108.3 million. For the year, mdf’s e-procurement business accounted for $52.8 million of the total, up 61 per cent from a year earlier, while its Unified Commerce platform generated $39.6 million for a six per cent year-over-year increase. E-marketplace revenues were $15.9 million compared to $14.7 million a year earlier.

Looking at fiscal 2022, CEO Luc Filiatreault said in a press release that it was likely the most transformative in the company’s history, which is saying a lot for a business that’s been around since 1996.

“The acquisition of Periscope makes mdf commerce a major player in government e-procurement in North America,” Filiatreault said in the June 29 press release. “On an annual basis, e-procurement now represents nearly 50 per cent of total consolidated revenue and grew by 61.4 per cent to $52.8 million compared $32.7 million last year. Since the acquisition of Periscope on August 31, 2021, the Corporation has onboarded over 100 government agencies and won 17 Contract Lifecycle Management deals. This performance was achieved despite considerable macro-economic challenges in the back half of the fiscal year.”

But the general market turn away from tech stocks over the past year has been rough on mdf, taking it from a high of $16 in February 2021 to now under $2.00 per share. The company’s recent difficulties may have something to do with it, as the market has developed a particular dislike for growth-oriented but profitless tech names, once a common prospect in the markets but now more of a pariah. 

And mdf’s fiscal 2022 fit that bill, matching high-growth on the topline with a less attractive bottom line, as adjusted EBITDA for the year was a loss of $2.0 million for an adjusted loss per share of $0.21. That compared to fiscal 2021 which sported positive EBITDA at $5.7 million while still posting an adjusted loss of $0.38 per share. 

But the takedown of mdf has gone too far, says Takacsy.

“This is one of many overly beaten-up tech stocks,” said Takacsy.

“The stock has come way down. And really, we feel it’s dirt cheap, trading at about 1x recurring revenues,” he said. “Recently, an activist hedge fund in the US has disclosed that it owns 11 per cent of the company, so we’re expecting to see some action going forward by this activist shareholder and we believe that great value can be unlocked by selling the e-commerce business, repaying all the debt and plowing the money into the e-procurement business.”

“If you use some varying low multiples that tech stocks are trading at these days, you can easily see a $6 stock price or more,” he said. “We see a lot of value and a catalyst there.” 

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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