NEW - TOP IDEAS: With a solid M&A strategy in B2B Software, Pluribus Technologies’ (TSXV: PLRB) integration and optimization expertise is yielding operating leverage, making it an attractive investment for small cap investors.

There is a strong similarity between Pluribus Technologies’ current business profile and that of Constellation Software (TSX: CSU) when it started out some 20 years ago. If Pluribus matures to being only a fraction as successful as the stock CSU, small cap investors will have still bagged a big winner. Today, Pluribus Technologies is appointed to Investorfile’s list of Top Ideas as a small cap value stock.

Based in Toronto ON, Pluribus Technologies Corp. (TSXV: PLRB - C$1.67) is a technology company with a very specific focus. The Company acquires smaller but profitable independent Business-to-Business (B2B) software companies with valuation discipline and then provides its portfolio companies with the expertise to grow.

The business model of Pluribus Technologies is centered on the Company’s Merger and Acquisition (M&A) strategy. Pluribus routinely acquires companies with complementary and strategic technology businesses, with the focus being on B2B software companies currently with $10 million in annual revenues or less that already generate normalized EBITDA margins in the range of 20%-30%.

To date, Pluribus acquisitions operate in four distinct B2B application software market verticals: eLearning, eCommerce, Digital Enablement and HealthTech. According to Pluribus, what makes these verticals attractive is their large Total Addressable Markets (TAM), with annual growth rates from 15%-25%. Pluribus’ portfolio companies that operate in the same vertical are often complementary to each other.

Once acquired, Pluribus portfolio companies are integrated with a business development plan, including new sales and marketing strategies, with a focus on cross-selling within the group. This integration plan falls under the guidance of Pluribus’ Management team to optimize growth and efficiencies. The goal of the plan is to elevate EBITDA margins of newly acquired companies to a target 35% within 12 months of the acquisition date.

Since 2019, Pluribus has purchased 13 B2B software companies which all operate in the aforementioned market verticals for a total capital deployment of about C$74 million. Of the 13, five acquisitions were completed in 2021. To date in 2022, four more acquisitions have closed, which include the companies in Pluribus’ eLearning vertical: Kesson Group and Tortal Training, Social5 (a company in the eCommerce vertical) and UK-based Rowanwood, a company which operates within their digital enablement vertical. Pluribus Management has publicly stated that it still expects to close on more acquisitions in 2022.

Given the amount of acquisition activity, Pluribus Technologies is seeing a tremendous amount of revenue growth. In Q1 of 2022, quarterly revenues were C$8.5 million, rising to C$9.6 million in Q2. Total revenues in the first half of 2022 amounted to C$18.1 million, which was up 244% from the prior year. Annual revenues are expected to be near C$40 million for 2022.

As a group, Pluribus has stated in a recent investor presentation that over 70% of its revenues are recurring in nature. Also, the Company has said that its combined revenue base is quite diversified, with no customer concentration above 10% of total revenues.

Since Pluribus only acquires profitable businesses, the Company has earnings. From the year-to-date financials released, for the first six months of 2022, Pluribus generated C$2.7 million of adjusted EBITDA. Just last month, Pluribus’ Management reiterated its financial guidance that the Company’s adjusted EBITDA should reach over C$8 million for 2022. This implies that Pluribus’ adjusted EBITDA margins will be near 20% this year, which is strong.

For Pluribus, we see a long-term trend of revenue growth outpacing the growth in expenses, which leads to the operating leverage and the continuation of increasing EBITDA margins.

In April 2022, Pluribus Technologies entered into an agreement for a new three-year, $42.0-million credit facility with National Bank of Canada. As of June 30, 2022, the Company’s balance sheet was in a net debt position of C$20.7 million. While the Investorfile blog is cautious when recommending small cap companies with net debt, we have some comfort in this case, given the Company’s recurring revenue base and healthy EBITDA margins. In our opinion, Pluribus' revenues are rather predictable and its earnings appear durable. We note the current debt leverage is about 2.5 times the adjusted EBITDA expected for 2022, which is still reasonable.

Pluribus Technologies began trading on the TSX Venture Exchange in January of this year after completing an RTO transaction and concurrent financing at C$6.75 per share. The shares are trading near its 52-week low price and currently at C$1.67. Today, the Company has a market valuation of about C$27 million.

Despite executing on its growth strategy to date, the market capitalization of Pluribus has dropped significantly throughout 2022, like so many other small cap tech stocks. With that said, current market valuation of this Company represents an investment opportunity to accumulate shares in what we feel is a high-quality and already profitable growth story. As such, Investorfile is recommending value-wise small cap investors to purchase stock in Pluribus Technologies up to a share price of $2.35. As always, investors in growth stocks should have a minimum investment horizon of 24 months to realize the capital appreciation potential.

Based on the most recent analysts’ consensus estimates for 2023 adjusted EBITDA (C$10 million), Pluribus currently trades at valuation of about 4.75 times EV/EBITDA. Today, if a small cap investor begins to accumulate shares of Pluribus Technologies up to C$2.35 (with an average cost base near C$2.00 per share), they are paying a valuation level that is close to 5.25 times EV/EBITDA. Based on this scenario, Investorfile considers buying Pluribus Technologies’ stock a value-wise investment opportunity for a growth company. We note that today, Pluribus Technologies’ shares trade at valuation levels well below its Canadian Software peer group and the most recent 12-month analysts' share price targets that range from C$4.50-C$5.00.

From the bios provided, Pluribas Technologies has a Senior Management team that has a track record to scale businesses, as well as a strong Board of Directors for a company of this size. Combined, Management and Directors own about 14% of the Company’s outstanding shares.

While we acknowledge that Pluribas Technologies is very much an acquisition growth story which is tied to the cost and availability of new capital, the Company’s integration strategy within its target verticals is expected to yield organic growth rates between 5-10%.The Company says that their organic growth initiatives require minimal additional investment.

In the last investor call, Management had stated that the Company currently has a strong M&A pipeline with many new acquisition targets already under non-binding Letter of Intent (LOI). Pluribas has said that it has currently about C$15 million of incremental capital available for future acquisitions.

The Company has 16 million shares outstanding and 19.7 million on a fully diluted basis. The most recent public filings indicate all option and warrant strike prices are significantly out-of-the-money and therefore currently are anti-dilutive for our valuation calculations.

Pluribas Technologies website: www.pluribustechnologies.com

Author Ownership Disclosure: TSXV: PLRB – Yes

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