Sunday, 22 November 2015

Mediagrif Interactive Technologies

Mediagrif showed up on my 52 week low list a couple of times this week.  It's an interesting sounding company, and my first thought on doing some preliminary research was that it appeared cheap relative to other more established B2B and B2C e-commerce businesses, but when something seems cheap, there's usually a good reason.

The CEO, Claude Roy, owns over 20% of the shares and, after taking over in 2008, seems to have grown the business via acquisition while at the same time curtailing spend via cost reduction.

The company trades at just over 15x ttm earnings and 14.3x fwd 2016 earnings.

The company also pays a modest dividend of $.40 per share, good for a 2.5% yield.

I'm having trouble finding comparable stand alone companies with a small enough market cap equivalent to Mediagrif.  In the US, there's NIC Inc., which provides ecommerce services to the US government.  From the sounds of it, the company could be compared to all of Alibaba, ebay, Ariba, NIC, Monster Worldwide, and to a lesser extent, Torstar (Workopolis).

While most of the above companies trade at premium multiples (ignoring Torstar and Ariba which is now owned by SAP), I suspect that Mediagrif's low multiple is a reflection of low growth.

Over the last 10 years, the company has grown sales from $50M to $70M currently, good for around 3.5% CAGR.  Since Mr. Roy took over in 2008, sales have grown at 5% CAGR.

EBIT and FCF have grown similarly, 3.1% and 4.9% CAGR respectively since 2006, but 5.6% and 9.7% respectively CAGR since Mr. Roy took over.

If I can summarize the company's offerings succinctly, I'd say Mediagrif offers a hodgepodge of e-commerce platforms.  Here's their profile:

And from the AIF:

Also in the AIF, a description of some recent events including:

  • The loss of a significant contract between the company and the Public Works and Government Services Canada for the use of the company's MERX platform to manage tenders
  • The acquisition of Jobboom Inc., from Quebecor for $56.8M
  • The acquisition of Reseau Contact Inc. from Quebecor for $7.4M 

I'm most interested in the Jobboom acquisition as the Public Works contract is ancient history.  The company paid $56.8M for Jobboom in June 2013, which was accretive to revenues and earnings in the year ended March 31, 2014.  From the 2014 annual report, it appears that Jobboom contributed $7.7M in revenues and $1.1M in profit from the date of acquisition.  On a pro-forma basis, had the acquisitions taken place on April 1, 2013, it sounds as if Jobboom would have contributed another $2 - $3M in revenue, and another $500-$600K in profit (assuming profit means net income after tax).

So, for somewhere between $10M - $11M in revenue, and $1.6M - $1.7M in profit, the company paid $57M, equivalent to 5.2x - 5.6x revenue, and 33x -35x profit (assuming profit means net income after tax).

Seems steep.  How has the overall business grown since Jobboom was acquired?  Revenues in 2013 were $60.7M (inclusive of Public Works), and revenues in 2014 inclusive of Jobboom's and Resau's contributions of $7.7M & $1M respectively were $65.4M, so I'm guessing that Public Works' contribution was around $4M ($65.4 - $7.7 - $1 - $60.7).

Normalizing for Public Works and full year contributions from both Jobboom and Resau, I'm guessing that the growth in Jobboom's and Resau's business since acquisition in 2013 is somewhere around ($71.3 - ($65.4 - $4) = $9.9M vs. $9.7 - $10.7M in Jobboom alone, so, no growth, and more likely negative growth.  From the company's recent MD&A, for the six months ended Sep 30, 2015, Jobboom along with other sites experienced decreases in revenue of $2.1M.

All of the above begs the question, with limited to no growth, why did management pay such a hefty price? And, if the acquisition was a poorly timed (or poorly valued) acquisition, what can management do about it now?  Heck, close to 30% of the goodwill on the company's balance sheet seems to be attributable to the Jobboom acquisition.

I suppose this is one of the reasons as to why the company seems cheap at first glance.

Management has emphasized its growth strategy going forward, and it seems to be acquisitive (let's hope that future acquisitions are wiser than Jobboom).   In the absence of any transformational acquisitions though, I'd hazard a guess that the company will continue to trade at a discount.

Here are my estimates in terms of valuation:

First, my Two Stage DCF Matrix:

Sum of DFC'sRe =
G = 8%9%10%12%15%Average, growth, blended Re
Average, Re, blended growth24.6820.8518.0214.1110.53

I'd be interested in the company only at G (0,0) - G(2,1), &  Re = 12%  - 15%  given it's low growth profile.

Next, my EPV analysis:

Cost of capital rates:EPVAdj for Debt & Excess CashAdj EPVO/S sharesEPV / shareBVPS / shareExcess EPVCurrent pricePrice / EPVPrem/Discount vs EPV
Stress test15%158.90-18.20140.7015.2759.217.91.1716.241.7676.31%
LT equity return; 2014 - 192810.50%227.01-18.20208.8115.27513.677.91.7316.241.1918.80%
Upper bound10%238.35-18.20220.1515.27514.417.91.8216.241.1312.68%
Combined NI & Div growth5.98%398.50-18.20380.3015.27524.907.93.1516.240.65-34.77%
Per GF4.17%571.58-18.20553.3815.27536.237.94.5916.240.45-55.17%

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