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Firm to Become 'Cash Flow Machine,' Analyst Asserts
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This should occur after realization of all potential cost benefits from the Q2/23 corporate acquisition, noted a Clarus Securities report.

Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) raised its merger cost synergies forecast on the heels of achieving a Q3/23 beat in adjusted EBITDA, reported Clarus Securities analyst Noel Atkinson in a November 9 research note.

"We continue to expect Data Communications to become a cash flow machine in 2025 once the cost synergies are realized" from the acquisition of Moore Canada Corp. (MCC), Atkinson wrote.

Compelling Investment Opportunity

The printing and technology services company, based in Ontario, Canada, is trading now at about CA$2.87 per share, noted Atkinson. Clarus' target price on it, in comparison, is CA$5.50 per share and implies an attractive potential gain of 92% for investors.

According to Clarus, Data Communications is a Buy.

As an investment, Atkinson wrote, the company's "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 pass-throughs and further potential torque if the company gets traction with new high-margin, subscription-based enterprise cloud offerings now entering the market."

The analyst added that "there is also increasing evidence of Data Communications building an economic moat within the Canadian commercial printing sector after the acquisition."

Synergies Estimate Raised

Data Communications increased the amount it expects to realize in terms of cost synergies from the MCC merger, Atkinson reported. Its revised estimate range is CA$30−35M, up from CA$25−30M. Similarly, Clarus forecasts cost synergies of about CA$30M.

About CA$17.5M of this savings total is expected to come to fruition in 2024, with the rest anticipated in early Q1/25, noted Atkinson, "as some of the sites with more complicated and/or larger workflows will likely remain open until late 2024 or early 2025."

Highlight of Q3/23 financials

Also, in his report, Atkinson pointed out that Data Communications achieved a "nice Q3 adjusted EBITDA beat," with the figure coming in at CA$11.8M versus Clarus' CA$10.3M projection. The analyst attributed the difference to better-than-expected gross margins and lowered sales,  general and administrative costs.

Gross profit margin was 24.7%, above Clarus' 24.4% projection but below Q2/23's 26.9%.

"Management remains committed to its target of at least [a] +5% revenue compound annual growth rate over the medium term," Atkinson relayed.

Sales and general and administrative costs were CA$25.1M, slightly higher than Clarus' $24.8M estimate. The sales expense was lower than Clarus expected, and the general and administrative expense was higher than anticipated, likely due to "more fulsome non-cash depreciation and amortization costs," the analyst noted.

"Capex remains well contained," Atkinson added.

Data Communications' revenue in Q3/23 was CA$122.7M, generally in line with Clarus' CA$124.3M estimate. Revenue from tech-enabled subscription services and fees was CA$4.5M, more than double those in Q2/23.

"We understand the summer was a bit soft, but September came back strongly," Atkinson wrote. "Management also noted that there was some seasonal product mix effect."

Debt Coming Down

Regarding cash flow during Q3/23, Atkinson reported, CA$8M came from operations. Free cash flow was CA$6.9M before lease principal payments and CA$3.1M after.

The company's net debt as of Sept. 30, 2023 was CA$95M.

Trenton and Fergus, the last two of the three production plants in Ontario that Data Communications acquired, are expected to be sold by early 2024 and yield about CA$15M in net proceeds. Also, from the sales of all three facilities, the company should realize about a CA$9M total pretax gain.

"If completed as announced, the Fergus/Trenton site sales will provide a solid (and nondilutive) addition of cash to the balance sheet after paying off the remaining few million dollars on the bank bridge line," wrote Atkinson.

Revised Near-Term Forecasts

Clarus adjusted some of its upcoming financial forecasts for Data Communications, Atkinson noted and provided the new figures.

For Q4/23, the new revenue estimate is CA$130.2M, down from CA$130.7M. The revised adjusted EBITDA projection is CA$13.9M, up from CA$13.7M.

For the full-year 2023, Clarus now projects revenue of CA$447.9M, down from CA$450M, and adjusted EBITDA of CA$75.5M, up from CA$75.3M.

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Important Disclosures:

  1. [Data Communications Management Corp.] is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000. 
  2. [Doresa Banning] wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
  3. The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

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Disclosures for Clarus Securities, Data Communications Management Corp., November 9, 2023

The analyst has visited this company’s operations in Brampton and Toronto, Ontario within the past 12 months. No payment or reimbursement was received from the issuer for the associated travel costs. Within the last 24 months, Clarus Securities Inc. has managed or co-managed a public offering of securities of the Company. Within the last 24 months, Clarus Securities Inc. has received compensation for investment banking services with respect to the securities of the Company. J.R. Kingsley Ward, a director of the Company, is a director of the parent company of Clarus Securities Inc.

General Disclosure The information and opinions in this report were prepared by Clarus Securities Inc. (“Clarus Securities”). Clarus Securities is a wholly-owned subsidiary of Clarus Securities Holdings Ltd. and is an affiliate of such. The reader should assume that Clarus Securities or its affiliate may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates and projections contained in this report are those of Clarus Securities as of the date of this report and are subject to change without notice.

Clarus Securities endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, Clarus Securities makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to Clarus Securities or its affiliate that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. No part of this report may be reproduced or re-distributed without the written consent of Clarus Securities. Conflicts of Interest The research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability of Clarus Securities and its affiliate, which includes the overall profitability of investment banking and related services. In the normal course of its business, Clarus Securities or its affiliate may provide financial advisory and/or investment banking services for the issuers mentioned in this report in return for remuneration and might seek to become engaged for such services from any of such issuers in this report within the next three months. Clarus Securities or its affiliate may buy from or sell to customers the securities of issuers mentioned in this report on a principal basis.

Clarus Securities, its affiliate, and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities discussed herein, or in related securities or in options, futures or other derivative instruments based thereon. Analyst’s Certification Each Clarus Securities research analyst whose name appears on the front page of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst’s personal views about the Company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst’s compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

Equity Research Ratings Buy: Attractively valued and expected to appreciate significantly from the current price over the next 12-18 months. Speculative Buy: Expected to appreciate significantly from the current price over the next 12-18 months. Financial and/or operational risk is high in the analyst’s view. Accumulate: Attractively valued, but given the current market price, is expected to appreciate moderately over the next 12 -18 months. Hold: Fairly valued and expected to trade in line with the current price over the next 12-18 months. Sell: Overvalued and expected to decline from the current price over the next 12-18 months. Under review: Pending additional review and/or information. No rating presently assigned. Tender: Company subject to an acquisition bid: accept offer. A summary of our research ratings distribution can be found on our website.

Dissemination of Research Clarus Securities’ Equity Research is available via our website and is currently distributed in electronic form to our complete distribution list at the same time. Please contact your Clarus institutional sales or trading representative or investment advisor for more information. Institutional clients may also receive our research via THOMSON and REUTERS.

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