Analysts Say Communications Company Is a Buy After Merger

It's been a big year for print and marketing services company Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) as it acquired a competitor, reported rising revenues, announced the closing of a CA$26.1 million equity raise and the sale and leaseback of a warehouse facility.

Several analysts following the company noted the positive catalysts and maintained Buy ratings on the stock.

The revenue results did not include the acquisition R.R. Donnelley & Sons' Canadian operations, Moore Canada Corp. (MCC), which DCM closed its acquisition of last month. The union is expected to almost double the company's revenue.

"The acquisition is considered an important milestone for DCM, providing an opportunity to build a better and much bigger business with a larger presence in the Canadian market," Chris Thompson of eResearch Corp. wrote on June 14. Thompson increased his one-year price target on the stock from CA$4.50 per share to CA$6.90.

"The acquisition is considered an important milestone for DCM, providing an opportunity to build a better and much bigger business with a larger presence in the Canadian market," Chris Thompson of eResearch Corp. wrote.

"DCM plans to accelerate its growth by capitalizing on an expanded range of products and services, better execution capabilities, and improved time-to-market for new offerings," Thompson wrote.

DCM reported Q1 2023 revenues were up 9.8% or CA$6.8 million over the same quarter in 2022 for total revenues of CA$76.1 million.

The company's gross profit accelerated by 16.3% or CA$3.3 million for a total of CA$23.7 million, and gross profit as a percentage of revenues grew from 29.3% to 31.1% during that period.

The new company would have about CA$520 million in annual sales, an expanded customer base serving more than 400 enterprise clients, and an enhanced product portfolio, DCM said.

Companies Benefit From 'Overlapping Facilities' in Merger

Thompson wrote that the merger would accelerate the implementation of DCM's strategy of expanding its services and solutions to its entire customer base.

DCM 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.

Clarus Securities analyst Noel Atkinson said the equity raise improves DCM's leverage ratio and "provides a buffer for funding the integration efforts."

Its clients are in many industries, including financial services, health care, emerging markets, retail, non-profits, energy, hospitality, and transportation.

The tech-enabled marketing and digital asset management (DAM) sectors are forecasted to grow annually by 15% and 21%, respectively, Thompson has said. DAM services generated only 1.3% of the company's revenue in 2022.

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.

DCM and MCC have "overlapping facilities" that would benefit from consolidation, Thompson wrote.

"The consolidated firm is poised to offer enhanced value and innovation to its customers, while DCM anticipates that this deal will establish a long-term, sustainable enterprise that caters to Canadian and U.S. customers," he wrote.

Shares Offer Exposure to Solid Revenue Growth

The company announced last month that it had raised CA$26.1 million in gross proceeds from the brokered private placement of about 8.7 million shares at CA$3 per share.

Mark Zaret, the chief strategist of the Teraz Fund at Spartan Fund Management, said he likes DCM because of its rapidly expanding digital segment. Its "digital first" strategy enhances its traditional paper-based business by managing digital assets that often connect to its paper products.

Clarus Securities analyst Noel Atkinson said the equity raise improves DCM's leverage ratio and "provides a buffer for funding the integration efforts (severance, closing facilities, moving equipment). We understand that management has been trying to balance the timing of merger integration efforts with cash flow."

Atkinson also maintained his Buy rating on DCM with a target price of CA$5 per share.

"DCM shares offer exposure to solid revenue growth, one of the largest and most diversified corporate client bases in Canada, some inflation protection via contractually permitted input cost passthroughs, and further potential torque if the Company gets traction with new high-margin subscription-based enterprise cloud offerings under development," Atkinson wrote.

Mark Zaret, the chief strategist of the Teraz Fund at Spartan Fund Management, said he likes DCM because of its rapidly expanding digital segment. Its "digital first" strategy enhances its traditional paper-based business by managing digital assets that often connect to its paper products.

"We end up with a company that's projected to have sales of more than CA$500 million a year. And its list of clients includes virtually every large company in Canada," Zeret said. "It would be harder to find a company it doesn't deal with."

Synergies From Merger

There were no restructuring expenses or one-time costs from the merger, other than the CA$6.1 million related to the acquisition of Moore Canada, DCM said.

"Data Communications is a high-quality company," Sadif  Investment Analytics wrote. "We believe [it] to be a good long-term investment that is likely to deliver long-term returns."

The purchase price was CA$130.8 million cash through revolving credit and floating rate bridge facilities from a Canadian-chartered bank and a new CA$50 million fixed-rate credit facility from Fiera Private Debt, the company said.

Included in the purchase were three sites owned by MCC with an implied net value of about CA$30 million. DCM said it had closed a sale and lease-back arrangement for one of the sites for CA$23.1 million.

As a result of the merger, DCM estimates it will see synergies in the range of CA$25 million to CA$30 million annualized after the next 18 to 24 months, Thompson with eResearch wrote.

"We assumed the merged companies could reduce operating costs by (CA)$2 million in Q3/2023, (CA)$5 million in Q4/2023, (CA)$12 million in 2024, and (CA)$24 million annually from 2025-2028," Thompson wrote.

'A High-Quality Company'

Sadif Investment Analytics ranked DCM in the 90th percentile overall when analyzed for quality, safety, and sentiment, it reported in a May 17 summary due diligence report.

"Data Communications is a high-quality company," Sadif wrote. "We believe [it] to be a good long-term investment that is likely to deliver long-term returns."

The company scored 92 out of 100 on Sadif's Summary StockMarks' ratings. This is calculated by and reflects how Data Communications stacked up against the entire population of 2,248 Canada-listed companies rated today on a dozen metrics at market close on May 17, 2023.

Sadif rates the Canadian firm company Good and recommends it as a Buy with a target price of CA$5.37 per share.

Ownership and Share Structure

Management and insiders own 31% of DCM, including a share program that gives employees close to 3% ownership.

Top insider shareholders include Director Michael Sifton with 9.2%, Board Vice Chairman Greg Cochrane with 6.3%, Chairman of the Board J.R. Kingsley Ward with 4.4%, and CEO Kellam with 1.4%, according to the company.

The rest, about 69%, is retail. KST Industries Inc. is the top shareholder in the company overall, with 9.4%.

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$132.19 million with about 55 million shares outstanding. It trades in the 52-week range of CA$3.81 and CA$1.01.

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1. Data Communications Management Corp. is a billboard sponsor(s) of Streetwise Reports and has paid SWR a sponsorship fee between US$3,000 and US$5,000. 
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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