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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- [Doresa Banning] wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
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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.
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