Scotia - “sector outperform” & $24 target Dye & Durham Ltd.’s recent US$905-million refinancing transactions provide balance sheet flexibility, according to Scotia Capital analyst Kevin Krishnaratne, who also thinks its free cash flow profile is “poised to benefit.”
“We view DND’s recently closed refinancing transactions (8.625-per-cent US$555-million senior secured notes due 2029, US$350-million term loan maturing 2031, CAD$105-million revolver maturing 2029), in addition to the repayment of prior existing facilities with Ares as continued steps in the right direction to enhance the company’s balance sheet flexibility,” he said. “Although leverage remains elevated at 4.78 times net debt to LTM [last 12-month] Further Adj. EBITDA as at Dec. 31 per company calculations, the refinancing moves eliminate prior risks related to the Ares facility maturity date being accelerated (to 2025 from 2026) if DND’s 2026 debentures were to remain outstanding. Furthermore, given how DND now intends to repurchase the remaining $185-million 2026 debentures, there is a long window until the company’s next debt related maturities, those being the 6.50-per-cent 2028 debentures. We note that there is a new springing maturity in place for the new revolver (2029) and term loan (2031), which may both see an acceleration in their maturity within 91 days of the US$555-million senior secured notes, if the latter are not repaid, extended, refinanced, or replaced prior to their due date.
“While we’ve not yet updated our model for the above transactions, management has indicated that it expects to achieve $20-million in annualized interest savings as a result of its moves. Recall how we have already been modeling a sharp rebound in FCF (including acquisition + restructuring expenses) in the back half of DND’s FY24 (June) moving from negative $1.3-million in 1H to $56.7-million in 2H on stronger RE seasonality, working capital normalization, and the successful execution of several cash flow enhancement initiatives vs. Q1 (pricing optimizations, reductions in capex, restructuring, and other costs). While there’ll be just incremental benefit to FY24 FCF results (less than $5-million), there is nice upside to our current FY25 FCF estimate of $112.0-million, before considering further interest savings/debt reduction via potential asset sales and natural deleveraging.”
Coming off a research restriction following the deals, the analyst acknowledged the legal software vendor continues to be exposed to real estate transaction volumes, but he said he’s “encouraged by management’s ability to advance more of its revenue to a recurring model via minimum volume pricing and upsell/cross-sell of more subscription practice management solutions, a strategy that should benefit from the rollout of its global Unity platform.”
“RE transaction-based revenue was 44 per cent in Q2 (Canadian RE transaction-based revenue was 19 per cent or even lower ex-refinancing activity),” said Mr. Krishnaratne. “Recent RE trends still point to being a bit mixed. In Canada, CREA data suggests RE volumes up 3.7 per cent month-over-month in January ahead of a 3.1-per-cent m/m decline in February, though trends have improved against a quieter fall. In the UK, Gov.uk provisional data shows seasonally adjusted transactions up 1.5 per cent m/m in January and up 1.2 per cent m/m in February. Meanwhile, Zoopla data indicated positive trends, reporting 9-per-cent y/y property sales over the one-month period through mid-March, along with ‘improving sentiment’. In Australia, new home sales were approximately flat m/m in January, followed by a strong 5.3-per-cent m/m increase in February, with volumes modestly higher y/y.”
The analyst reaffirmed a “sector outperform” recommendation and $24 target for Dye & Durham shares. The average on the Street is $21.17.
“Shares have performed well post Q2 results mid-Feb (up 30 per cent), but we continue to see further upside with the stock trading at 7.6 times calendar 2024 estimated Adj. EBITDA and 11.8-per-cent CY24 FCF yield (13.7-per-cent PF interest cost savings via recent debt refinancing),” he concluded. “Additionally, we still see opportunities for even further balance sheet optimizations via the sale of non-core assets and other initiatives to deleverage and drive FCF upside.”