Onfolio (ONFO-NASDAQ)

Market Opportunity and Acquisition Strategy. There are hundreds of thousands, if not millions, of ecommerce businesses in the United States alone. We believe this highly fragmented market is ripe for an acquisition strategy. ONFO has used approximately $6M of its IPO proceeds to make four acquisitions: SEO Butler, Proofread Anywhere, BWPS, and Contentellect. This brings the portfolio to 22 independent businesses. Consistent with the company’s stated intentions, these four businesses were acquired for an average of 3.2x run-rate adjusted EBITDA. In essence, ONFO is acquiring SaaS quality cash flow without paying SaaS prices. We forecast that combined, these acquisitions will add an incremental $5.5M in revenues and $2.4M in adjusted EBITDA and will be immediately accretive to earnings and cash flow. As ONFO reaches cash flow positive from operations, the market should reward the company with higher valuation multiples. Public EBITDA multiples for competitors and comparable business models average out approximately ~12x. We have applied a 25% discount to this figure in our valuation model (9.5x), but that still results in a meaningful spread over acquisition multiples.

Management Experience and Incentive. Dominic Wells, the CEO, has an impressive history with ample experience building online businesses from the ground up, as well as buying and optimizing their profitability. The company notes that it has seen annual profits of acquired companies increase up to 300% in some cases. Insiders own approximately 30% of the company, of which Mr. Wells' shares represent about 24%. Any acquisition strategy relies heavily on the competence of management, and while there’s execution risk, both experience and incentive alignment with shareholders appear to be a net positive.

FCF & Operating Leverage. As highlighted by the four most recent acquisitions, online businesses scale well, have an attractive margin profile, and require little-to-no capex (high FCF conversion). SEO Butler, Proofread Anywhere, BWPS, and Contellect are expected to add approximately $5.5M in revenues and $2.4M in adjusted EBITDA (roughly 40% margin), and this is presumably before management implements any synergies/efficiencies. Fixed costs for these businesses are very low. We believe that ONFO already has the infrastructure in place to scale its operations and any incremental G&A should be minimal. We expect operating expenses as a percenatge of revenue will begin to fall precipitously with newly acquired gross profit dropping straight to FCF.

Balance Sheet & Valuation. With a $9.6M market cap, ONFO is trading at less than the approximately $12M in cash on the balance sheet as of September 30, 2022, its latest filing. With virtually no debt, the company has been trading at a negative enterprise value. It has not yet generated positive cash flow, but management expects to reach this milestone in 1H2023. While the valuation looks cheap relative to its net cash position, a deeper look shows us that ONFO is turning into a cash-flow story. We believe that the realization of positive FCF operations should act as a catalyst for a multiple re-rating and a closing of its discount to book value. With a BVPS of $2.65 and a stock price of $2.00, there remains approximately 35% upside to close the gap. We have forecasted that ONFO will generate $1.5M in run-rate adjusted EBITDA by 1Q2024, after investing the remaining proceeds of its IPO. Using an average of comparable company multiples and discounting it by 25% to account for additional risk, we have applied a 9.5x EBITDA multiple to our EBITDA forecast, resulting in an enterprise value of $15.4M. We are initiating coverage with a Buy rating and a $3.00 price target.

Risks. Risk factors include integration risks related to acquisition strategy, compression of relative valuations multiples, and key man risk. A weakening of the macro-economic environment could have negative effects on consumer discretionary spending which would have an impact on revenues. The company has a limited history operating as a public company and has incurred operating losses since its inception. The company may need to raise additional capital to expand the business, resulting in added debt and/or equity dilution. Changes to email privacy laws and exposure of digital marketing companies to the ever-changing algorithm landscape of firms such as Meta, Apple and Google (SEO) could hurt ONFO's business model. Other risks include poor allocation of capital decisions regarding acquisitions, supply chain disruptions and regulatory risk. We encourage prospective shareholders to review ONFO’s SEC filings in conjunction with this report.