i3 Verticals, Inc. (IIIV) is a payment and software solutions provider for small businesses with a focus on under-penetrated, fragmented markets that lack integrated payment functionality. i3 was founded in 2012 by Greg Daily, who has had several successful exits in the payments space. Daily sold his first company, PMT Services, to Nova for $1.3B in 1998. i3 initially focused on payments but has made a concerted shift to integrating payments with software, with integrated payments now representing 63% of its payment volume. (Source: 4Q21 earnings call) The company’s primary vertical markets are public sector and healthcare, though i3 also has offerings in the hospitality, retail, B2B, and non-profit sectors. Public sector is i3’s key focus and fastest-growing vertical, now comprising approximately half of its revenues on a run-rate basis. (Source: 4Q21 earnings call) We believe i3 has benefited from local governments seeking to modernize their technology, a trend that we think was only accelerated by Covid.
We believe the i3 story is one of acquisitions. The company has spent over $400M on 21 acquisitions since 2019, averaging 7 acquisitions per year. i3’s preferred target has been family-run businesses generating under $10M of EBITDA and featuring ~10% organic growth. i3 has acquired these businesses at what we think is a reasonable ~8-10x multiple, facing little competition from other buyers. (Source: i3 3Q20, 4Q20 and 2Q21 earnings calls) We believe the company has successfully used acquisitions to further its key objectives of growing its exposure to the public sector vertical and increasing the share of its software revenues, leading to higher growth and improved margins. Below is a summary of i3’s recent acquisition activity:
We think i3 has successfully executed on its rollup strategy, becoming an integrated payments player with a growing exposure to higher-margin software and establishing a leading position in the public sector vertical.
We believe that the Street is underestimating the EBITDA generation of the business, and we think that management’s guide of FY22 Adjusted EBITDA of $70-78M is likely conservative. While the picture is complicated by i3’s many acquisitions, our “normalized” Adjusted EBITDA figure points to upside versus current expectations.
We arrive at a 23E Adjusted EBITDA estimate of $86M by assuming that i3’s FY19 base of organic Adj. EBITDA (excl. the impact of FY20-22 acquisitions) grows organically at 5% in FY20 and 10% thereafter. We then layer on the additional EBITDA from i3’s FY20-22 acquisitions, assuming that the acquisitions were made at a 10x EBITDA purchase multiple. Our estimate excludes the impact of any future acquisitions.
As of 12/06/21, i3 is down more than 40% from its 52-week high and is down ~2% since reporting what we believe to be strong 4Q21 earnings, with i3’s revenue and Adj. EBITDA both beating consensus and management guiding to double-digit organic growth in FY22. (Source: Bloomberg consensus estimates and 4Q21 earnings call)
Our Adj. EBITDA estimate implies that i3 trades at a 10.6x 23E multiple, whereas i3 has historically traded at an average multiple of ~16x. (Source: Morgan Stanley 11/19/21 research report)
Applying a multiple range of 14-18x to our 23E Adj. EBITDA estimate of $86M implies that i3 should trade between $28 and $39 a share, representing a 36-87% premium to the price of $20.77 at market close on 12/06/21.
Increased competition from buyers and rising multiples may make it more difficult for i3 to execute on its acquisition-led growth strategy
Integration risks from i3’s many acquisitions
Continued Covid impact on payments volume, especially in the education vertical
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Reported EBITDA beats consensus expectations
Further announced acquisitions, solidifying i3’s growth in the public sector vertical