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Communications Co. To Acquire 'Perfect Fit'

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Printing and marketing services company Data Communications Management Corp. has entered into a share purchase agreement to acquire R.R. Donnelley & Sons' Canadian operations.

Printing and marketing services company Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) has entered into a share purchase agreement to acquire R.R. Donnelley & Sons' Canadian operations for CA$123 million, the company said.

R.R. Donnelly Canada provides print and related services to thousands of customers across the country, had a revenue of about CA$250 million in 2022, and has 1,000 employees.

The companies are "a perfect fit," DCM President and Chief Executive Officer Richard Kellam said after the announcement.

The transaction "combines two companies with complementary operating models and best-in-class products, (and) very strong customer relationships," he said. "It's also very complementary to some of the digital-first technology capabilities we've built here at DCM, and the opportunity to expand those into RRD's clients.

Analyst Chris Thompson of eResearch maintained a Buy rating on the stock with a target of CA$4.50 even before the announcement based on third-quarter 2022 results that showed revenue up 11.4% YoY from 2021.

There (are) many meaningful benefits for our clients and for our customers, being bigger and better together and obviously, attractive financial benefits and value creation opportunities for DCM."

Analyst Chris Thompson of eResearch maintained a Buy rating on the stock with a target of CA$4.50 even before the announcement based on third-quarter 2022 results that showed revenue up 11.4% YoY from 2021.

Preliminary results for 2022 show the company's revenues up 15% to 16.5% over 2021. The company is expected to release the final 2022 results later this month.

"As DCM executes its 'digital first' strategy, we expect revenue from technology-enabled hardware solutions and tech-enabled subscription services and fees to increase," Thompson wrote.

The tech-enabled marketing and digital asset management (DAM) sectors are forecasted to grow annually by 15% and 21%, respectively, Thompson said. DAM services generated only 1.3% of the company's revenue in 2020.

But "with the proliferation of video and digital content, the total DAM addressable market is forecasted to reach US$6 billion by 2025, thus there is plenty of upside revenue potential," Thompson wrote.

The Catalyst: More than CA$500 Million in Annual Sales

The new company would have more than CA$500 million in annual sales from day one, an expanded customer base, and an enhanced product portfolio, DCM said.

DCM is only buying the Canadian operations of RRD, which is a provider of marketing, packaging, print, and supply chain solutions with 25,000 clients worldwide across 29 countries.

"They serve key verticals from financial institutions, retail, insurance, transportation, government, and other regulated industries," Kellam said.

RRD said it serves "thousands of customers across Canada."

"Combining our business with DCM is a strategic opportunity to broaden our existing offering to customers across a variety of industries," RRD President Rael Fisher said.

Under the share purchase agreement, DCM will acquire 100% of the shares of Moore Canada Corp. (RRD Canada) in a transaction expected to close in the second quarter of this year, subject to closing conditions and regulatory approvals.

DCM is financing 100% of the purchase in cash through "fully committed credit facilities from a Canadian Chartered Bank and Fiera Private Debt," the company said in its news release.

Included in the purchase will be three sites owned by RRD with an implied net value of about CA$30 million. DCM said it intends to enter into a sale and lease-back arrangement for each site.

DCM Had a 'Very Solid Year'

In its preliminary results for the fiscal year ending Dec. 31, 2022, DCM said total revenue increased to between CA$270 million to CA$274 million, or a jump of 15% to 16.5%, over 2021.

Gross profit as a percentage of revenue increased in a range of 30.5% to 31%, with gross profit increasing between 20% and 21% YoY.

The company plans to release the final results for 2022 and the fourth quarter of that year on March 21.

"We had a very solid year on revenue and revenue acceleration," Kellam said. It was "one of the best growth years that we've delivered on record here in DCM. We're very proud of the revenue acceleration, and the value we're bringing to clients in the marketplace."

DCM launched its DAM cloud solution, ASMBL, to manage corporate media files and other content, in 2021. The company has said the technology has the potential to become a key growth opportunity for DCM as it is deployed to the company’s 2,500 corporate clients.

DCM has been in business for 60 years. It helps companies with branding, communications, and logistics and provides customer loyalty programs, data, and content management, location-specific marketing, labels and asset tracking, multimedia campaign management, and workflow management. Its clients are in many industries, including financial services, health care, emerging markets, retail, non-profits, energy, hospitality, and transportation.

Ownership and Share Structure

Streetwise Ownership Overview*

Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX)

*Share Structure as of 3/2/2023

Management and insiders own about 45% of DCM, including a share program that gives employees close to 4% ownership.

Top insider shareholders include Director Michael Sifton with 10.2% or 4.5 million shares, Board Vice Chairman Greg Cochrane with 7.43% or 3.28 million shares, Chairman of the Board J.R. Kingsley Ward with 5.54% or 2.44 million shares, and the CEO Kellam with 1.66% or 0.73 million shares, according to Reuters.

According to the company, the rest, 55%, is retail. Reuters lists KST Industries Inc. as the top shareholder in the company overall with 11.69% or 5.15 million shares.

The company is covered by Noel Atkinson of Clarus Securities and Chris Thompson of eResearch. Newsletter writer Clive Maund also covers the stock. 

It has a market cap of CA$82.84 million with 44 million shares outstanding, with 27.3 million shares free-floating. It trades in the 52-week range of CA$1.97 and CA$1.01.

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1) Steve Sobek wrote this article for Streetwise Reports LLC. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None.

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eResearch Analyst on this Report: Chris Thompson CFA, MBA, P.Eng.

Analyst Affirmation: I, Chris Thompson, hereby state that, at the time of issuance of this research report, I do not own common shares, share options, or share warrants of DATA Communications Management Corp. (TSX:DCM).


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