mdf Commerce Inc T.MDF

RE:David Fawcett- Epic Capital

[Possibleidiot01]

Now I have gone back

Sean Bouwers, CFA, MFinSean Bouwers, CFA, MFin • 3rd+ • 3rd+ Associate Portfolio ManagerAssociate Portfolio Manager 4mo • Edited •

4mo • Edited •

 

 

 

MDF trades at 1.5x revs. Take outs in e-procurement are happening at 4x+.
Growing positive EBITDA and no balance sheet risks - we believe this could be a double.

David Fawcett, MA, CFADavid Fawcett, MA, CFA • 2nd • 2nd Founder of Epic Capital ManagementFounder of Epic Capital Management 4mo •

4mo •

 

MDF Looking Good from a SOTP Perspective

In June, we pointed out the encouraging technical performance of MDF when the stock was trading at $3.35 per share, and as of yesterday, it closed at $4.10 per share. Now, let's delve into our fundamental perspective on MDF. We believe that MDF holds the potential to double in value, primarily driven by its sum-of-the-parts valuation. Notably, MDF is currently trading at approximately 1.5X EV/Sales, an unusually low valuation for a SaaS company. A significant portion of MDF's revenue, approximately two-thirds, is derived from its e-procurement business.

An insightful benchmark for assessing MDF's value is the acquisition of Mercell by Thoma Bravo in August last year. Mercell, a European provider of e-procurement software, was acquired at a 4.5X EV/Sales multiple. By applying a similar multiple to MDF's e-procurement revenue and a more conservative 1X multiple to the remaining revenue, our calculations indicate a potential value exceeding $9 per share.

Furthermore, MDF has made substantial progress in enhancing the profitability of its business over the past year. EBITDA margins, just reported at 13% for 2Q24, have shown a significant improvement from the prior year's 4%. These margin enhancements were primarily achieved through cost-cutting measures, and we anticipate more efficiency gains in the pipeline, including a reduction in headcount, cloud migration, and the forthcoming removal of a significant lease cost in the next quarter.

Additionally, the company has secured new contracts that should contribute positively to its future revenue streams. The company's balance sheet is in a healthy state, featuring essentially zero net debt. These improving margins and the robust balance sheet provide a fundamental safety net against potential downside risks.