Mad Paws Holdings Ltd: Has the Currency to Be the Top Dog
Mad Paws Holdings Ltd
Has the currency to be the top dog
Mad Paws Holdings Ltd (ASX:MPA) is an Australian-based and -focused pet services business operating an online marketplace that matches and connects pet owners with pet service providers. The marketplace comprises proprietary technology that has been custom-built for local pet services, is optimised for web, mobile and app, manages payments and provides reviews/ratings. The site was founded in 2015 and since then has facilitated ~117k bookings. Unlike most online marketplaces, MPA does not benefit from online migration during COVID-induced restrictions as the business currently relies on dog sitting, hosting and visits for ~89% of revenue generation, which in turn is driven by pet owner travel plans. While easing travel restrictions has and will see a booking rebound, there are a number of other compelling medium-term themes driving customer/revenue growth including increased pet ownership, the “humanisation” of pets and the addition of new verticals to capitalise on a growing customer base. Rover in the US provides a good roadmap for MPA’s potential growth and profitability and provides solid valuation support at current prices.
Business model
MPA operates an online 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 ~110k unique customers since launch in 2015 and is looking to utilise this growing database to offer other pet services such as food delivery and insurance to capture a greater share of a conservatively estimated $4.0b addressable market.
New business streams & the cycling of COVID positive for CY22
From a customer base of ~117k and growing (~38k new customers added in a disrupted FY21 alone) MPA is looking to offer new products and services on its platform to increase recurring transactions/revenue. Food subscription and insurance were introduced over FY21, while the Waggly Club (treats and toys) was acquired late FY21. As a result, subscription ARR in Q1FY22 has grown by 32% and subscriber numbers by 42% on the back of cross-selling. Over the medium-term our implied market penetration for all these services is generally <5% of our estimated cumulative customer pool, which itself is only forecast to reach ~5% of all dogs in Australia by FY25.
Valuation of $0.35/share or $76m market cap
Based on our earnings assumptions we derive a DCF valuation for MPA of $0.35/share diluted for all in-the-money options. The combination of a growing customer pool, growing penetration of this pool for new products/services, and lower longer-term customer acquisition costs drives this valuation and offers significant upside for both penetration rates and new products/services. FY21 EV/Revenue peer comparisons suggest MPA is trading in- line with our selected peer group, a 42% discount to closest peer Airtasker (ASX:ART) and a 42% discount to US peer Rover (NASDAQ:ROVR).
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