MHH:NYSE

The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

MHH: NYSE

Mastech Digital, Inc. (MHH) is a provider of Digital Transformation IT Services. It offers data and analytics solutions, master data management, digital learning, and IT staffing services for both digital and mainstream technologies. MHH has two business segments: data and analytics services and it staffing service. The data and analytics services (D&A) segment delivers specialized data management, data engineering, customer experience consulting and analytics services onsite and offshore. The IT staffing services (IT) segment provides outsourced business processing. MHH recruits for both segments through global recruitment centers located in the U.S. and India.

Investment Thesis

We believe MHH is an underfollowed IT services company in the midst of transforming from an IT outsourcing/staffing company to a faster growing, higher margin data and analytics services company. Through a series of acquisitions, MHH added data and analytics capabilities which bring higher value IT projects and higher margins.[2] We believe as the company’s business mix shifts more towards data and analytics through organic and inorganic growth, margins and earnings power should increase. Our expectation is that earnings can more than double over the next few years.

Confirmation through Research

MHH’s two co-founders and current co-chairs of MHH’s board own approximately 60% of MHH shares outstanding.[3] They previously sold a similar company to Capgemini for approximately $4 billion in 2015.[4] We believe the current version of MHH is essentially a replay of their first business – building a project and analytics based business on top of a staffing business.

The D&A segment manages IT projects. It is a specialist in data management and advanced analytics, with a track record of hundreds of successful projects, implementations, and deployments for Fortune 500 companies and public sector.[5] It is built around MHH’s 2015 acquisition of InfoTrellis which we believe had well over 20% operating margins and was growing over 20% at the time of purchase. We think segment should grow revenue 10% or higher organically and generate 20%+ operating margins in the next few years as it scales. Recent investments to expand the product suite and to grow the salesforce reduced the margins from historical levels of over 20% plus to 4.5% in the most recent quarter. [6] We believe this is margin decline is short term and the company will revert back to its normal 20% plus level.

Outside of organic growth, the D&A segment should continue to grow via acquisitions. As noted MHH acquired InfoTrellis in 2017 for $36 million at 6x trailing EBITDA.[7] MHH acquired AmberLeaf in October 2020 for $14 million[8] and assuming earn outs are paid we believe that acquisition would be a similar EBITDA multiple to the InfoTrellis acquisition. This compares to MHH trading at approximately 12x EBITDA.[9]

In general we expect the legacy staffing business to grow 5-7%, or about 2-3x GDP as global IT spend grows faster than GDP. We would note that MHH’s staffing business grew around 8% per year from 2011-2019[10] therefore, our expectations may be conservative.

Variant Perception

Mastech Digital (MHH) is a small company with little analyst coverage and a market capitalization of around $200 million. These two factors have allowed the company to fly under the radar with a far below market P/E. As noted above, we believe they can grow above peers due to improved margins. As its mix shifts more towards D&A its earnings power should increase given the segment’s historical 20%+ operating margins and double digit revenue growth. In our opinion, earnings could more than double over the next few years.