Mad Paws Holdings Ltd - A Prescription for Accelerated Growth
Mad Paws Holdings Ltd
A prescription for accelerated growth
Mad Paws Holdings Ltd (ASX:MPA) has announced the acquisition of on-line marketplace/retailer Pet Chemist for $20m plus a potential $5m earn-out. Pet Chemist is a combination of an on-line marketplace for pet medication and an online retailer of pet health products. The purchase price represents 2.7x annualised H1 FY22 revenue and will be funded by the issue of $14.5m in stock at $0.23/share plus $5.5m cash to the founders, and a $7.1m capital raise in the form of a placement and SPP at $0.18/share. Pet Chemist has 44k active customers which represents ~33% of MPA’s existing customer pool. The cross-sell opportunities for the two groups are significant and reflected in the earn-out metrics. From an annualised revenue base of $7.2m as at December 2021, Pet Chemist will need to achieve revenue of $16.8m-$22.5m in FY23 and $22.8m-$32.7m in FY24 to qualify for the earn-out. We have used the mid-point of this range to frame our medium-term earnings estimates. The result is material (~23%) EPS upgrades off our (more meaningful) FY26 earnings base. Most of our upside has been built into Pet Chemist, with little change to the rate of customer acquisition for the Mad Paws marketplace and Waggly/Dinner Bowl subscription businesses.
Business model
MPA operates an on-line marketplace which connects service provides with pet owners, predominantly for dog hosting, dog sitting and dog visits. MPA charges a 7% booking fee to “customers” and a 20% commission on the total service fee (less the booking fee) for service providers. The group operates a negative working capital model, with payment received pre- service provision and released post-service provision. The group has had ~133k unique customers since launch in 2015 and is looking to utilise this growing database and acquire new ones to offer other pet services such as food delivery and healthcare to capture a greater share of a conservatively estimated $8.0b addressable market (now including pet healthcare).
Significant cross-sell & margin opportunities from Pet Chemist
The 44k active customers of Pet Chemist represents ~12 months of customer gains for MPA or~33% of the current MPA customer base of 133k. This customer base has grown 68% or 18k from 12 months ago, highlighting the growth of the combined MPA/PC offering. There are significant cross-sell opportunities between the marketplace and Pet Chemist given a similar customer demographic, and while we have focused on the opportunity for the MPA marketplace and company infrastructure/human resources to add value to Pet Chemist, the benefits are likely to run both ways.
Valuation increased from $0.35/share to $0.43/share diluted
Our DCF valuation for MPA has increased from $0.35/share to $0.43/share diluted for all in- the-money options, the issue of shares relating to the Pet Chemist acquisition and a rollover to the next financial year. While there are a number of new assumptions for the valuation, the key is Pet Chemist achieving the mid-point of earnout revenue targets together with a higher gross margin for its OTC/retail business. Our assumptions for the marketplace are unchanged but likely to benefit from the cross-sell opportunities to Pet Chemist customers.
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