Globe and Mail - August 15th, 2022
Monday’s analyst upgrades and downgrades
In a research note titled A Sober Assessment of a Difficult Year, Echelon Capital Markets analyst Amr Ezzat lowered his recommendation for Mdf Commerce Inc. (MDF-T) to “speculative buy” from “buy” after weaker-than-anticipated first-quarter 2023 results, believing it has underperformed since its $259.9-million acquisition of Periscope Holdings Inc. last year.
“Post the closing of the acquisition (FQ222 and FQ322), we anticipated that Periscope would average $11.6-million in revenues per quarter based on management guidance,” he said. “At the time, we had forecasted $11.7-million per quarter post-C2021, which assumed very modest growth from the ... $11.6-million management guidance.”
“Fast forward a year, we estimate that Periscope is running at $9.0-9.5-million per quarter, 20-25 per cent below our forecasts. Periscope has therefore significantly underwhelmed, with revenues not only falling far below our F2023 estimates, but with results that are currently tracking significantly below management’s C2021 estimates.”
Believing “Periscope’s pre-acquisition prospects of meaningful, profitable growth have yet to materialize,” Mr. Ezzat emphasized the company’s “ballooning” costs and “growth debt pile” following the deal.
“Accretion from the acquisition is yet to be visible and the deterioration in MDF’s once pristine balance sheet, to a highly levered one, has yet to be justified by the acquisition,” he said.
At the same time, he called the “collapse” of valuations for technology companies “a double whammy” with MDF down 76.3 per cent over the past year.
“Investors should acknowledge that part of MDF’s lacklustre share price performance is also attributable to sector-wide multiple compression in the tech sector,” he said. “Namely, multiples have roughly halved since their peak in the second half of C2021, with e-commerce-related companies facing even greater investor apathy and a more violent selloff. We note that BigCommerce Holdings Inc. (BIGC-Q) and Shopify (SHOP-T) are down 67.0 per cent and 72.8 per cent in the last year, respectively. Nonetheless, many of the aforementioned concerns have certainly exacerbated MDF’s multiple compression, as it now trades at only 1.0 times our F2023 revenues estimate, a significant discount to comparable companies’ 4.5 times NTM [next 12-month] sales multiple. Additionally, MDF completed the Periscope acquisition in August 2021, coinciding with near-peak tech multiples.”
Recalibrating his multiple and valuation parameters in response, Mr. Ezzat cut his target for the Montreal-based company’s shares by $1 to $5, implying 111.6-per-cent upside to current levels. The average on the Street is $3.60.
“While the highly levered capital structure and poor operational performance have increased the Company’s risk profile, we believe the current valuation provides the enterprising investor with a lot of room for upside,” he said.