August 20th, 2022                         Investment thesis by:  Tom Fedichin @mrjones321

 

Direct Communications Solutions $DCSI.C    New Top Pickfrom Tom Fedichin

 

 

 

O/S:                           16,135,650      FD:  20,659,587   

Share Price:                 $1.14

Marketcap:                  $18,394,641

Cash:                              $2.5M        

Long term debt:            $1.5M

Insider ownership:        7.792M Shares    42% insider ownership    

Years in business:          6

EV/Sales  TTM               1.28  

 

Company Description:  Direct Communications Solutions (DCS) has built an IOT business that provides multiple streams of income today with so many more opportunities yet to tap into.  Some of DCS’s product/services offerings are telematics, SAAS model for data storage, hardware sales, customizingsoftware applications for clients, retail applications, security, ESG, beer industry and more.   DCS has 450 partners throughout North America including most major telco’s.  DCS offers more than 2000 distinct solutions and claims to have connected over 900,000 devices in use.   Their main business offering today is their Mifleet product which provides GPS, fleet management and the ability to monitor driver behavior, speed, braking etc.    DCS offers trucking companies many other solutions for tracking of goods such as heat, pressure, humidity, proximity, door opening/closing, light and much more.  DCS addresses client’s problems by simplifying IOT technologies, making them less costly, easier to deploy, and ultimately more efficient.

 

Examples of some of DCS’s recently announced contracts are a new school 157 bus telematics contract for student monitoring in Duplin North Carolina which provides stored video data which is streamed through partner US Cellular.   Another major contract recently announced is with Arrow Transport in Canada through their parent US company Streamline.    This new major client will take advantage of many of the services described above. 

 

Management has combined over 100 years of experience from the telco industry.  CEO Chris Bursey who btw is the largest shareholder with 6.5M shares sits on Verizon’s advisory boardand is considered a pioneer in the IOT sensor space which is probably why so many telco’s are offering DCS sensors through their channels.  Some of the more recognizable names include AT+T, Verizon, US Cellular, Rogers, Telus, Bell and T-Mobile.

 

Growth: DCS has been pushing its SAAS offering with its cloud storage offering.   Their SAAS service offering provides gross margins of 70% and saw increased sales increase 26% YOY.   Product hardware provides a gross margin of 27.5% and witness YOY gains of 88%.

 

Now Covid impacted so many companies worldwide, especially those who require microchips.   During 2021 into early 2022 DCS also felt the pain of this chip shortage problem which greatly impacted their sale of new devices.   That said Q1 2022 saw sales increase 88% over 2021!   Why the spike?   Two reasons.  First the supply chain issues for chips started to abate but secondly the major telcos are moving away from 2g and 3gand onto the newer 4g and 5g networks.   AT&T and Verizon will have eliminated their older legacy networks by years end.  This means that all old sensor hardware will become obsolete once these new network upgrades have been completed.   So many companies offering sensor hardware in the IOT space have yet to upgrade to 4g+ which means there is a massive opportunity for company’s such as DCS and competitor Digi which trades on the Nasdaq $DGII.    Now if you look at Digi you will see their growth has also taken off.   Estimates for the IOT industry growth rate range between 14-29% a year which provides tremendous upside for the leaders in this space.

 

Q1 2022:

DCS had revenues of $7.8M USD up 81%

Net income of $600k USD or 4c/share USD for Q1 alone. 

Blended margins of 30.9% 

 

Management discussion:

Now in chats with Bill Espley who does company IR he tells me that the chip shortage appears to be coming to an end.  They are not witnessing the same delays of the past and they feel that by Q4 that chips should again be readily available which bolds very well for future quarters.

 

Management has decided on doing a convertible debenture financing which converts at $1.19 USD which equates to $1.50 CDN.  This debenture financing pays 10% /year over two years.  As a bonus to participants the financing comes with a half a warrant at $1 USD.  In chats with director Mike Zhou he tells me that they require this money to satisfy their Nasdaq listing requirements.   The company really doesn’t need any money right now except for this Nasdaq requirement.   He did say though that with the anticipated growth that any new monies brought on they feel they can turn over twice in a year.  He also stated that management has intentionally kept the share float smaller.  I was also told that CEO Chris Bursey reduced his holdings in order to give his employees shares.   I need to verify the amount again but I believe it was 3m shares and of course he still holds 6.5m shares.   The company has strived to create a positive corporate culture which benefits their staff as well as management.

 

I asked about what’s involved for their Nasdaq listing such as will there be a share rollback?   I was told there could be a small one.   I was told to look at $DGII as the multiples for this other profitable IOT sensor company is approx. 100 PE or 19x forward earnings. This bolds well for DCS which is cashflow positive and growing   Will DCS delist from the CSE?  More than likely.    

 

Will sales continue to increase at the same rate?   Management is very tight lipped.   I called a year ago and wasn’t given any guidance and they haven’t changed this time.   Management has to be extremely careful especially with the Nasdaq listing and cannot give forward guidance.  All they can say is to look at the recent contract wins and also look at the many industries that DCS has yet to tackle.   Management is going after their low hanging fruit (SAAS) over the next two years and believe that they can increase margins on hardware from 30-45%.   They also plan doing some M&A.   

 

My Thesis:

With a combination of the chip shortage coming to an end and with management saying that they can turn over any new cash brought in by 2X a year, I have to believe this speaks volumes about their future revenue growth.   Management is taking a lot of pride in operating a profitable venture as most in this space are not.   Also the other tell is the debenture financing pays 10%/year and converts at $1.19 USD and is being held at a time when earnings will be out any day.   The earnings will be released before the financing closes which tells me the company has a lot of confidence with their upcoming Q2 earnings results.

 

Now knowing that 2021 was greatly affected by supply chain problems ie the chip shortage I believe that DCS should be able to attain 80 to 100% growth quite easily this year over lastwhich had much slower sales.   That said if we are to annualize Q1 2022 sales throughout the rest of 2022 the company would see revenues of $31.2M USD. I believe there is a good chance that with a Nasdaq listing combined with new additional capital (guestimate for raise of Nasdaq IPO raise $10m +) that sales have the potential to increase by 50%+ above the estimated annualized revenue given above($31.2M).    Knowing that management feel that they can turn over any newly raisedcapital they obtain by 2 X/year or $10m x 2X is an added $20m in sales. Given the push for IOT sensors for many new industries I believe DCS can grow at a minimum of 50% quite easily for for the next two years plus with new network hardware upgrades and I believe DCS earnings/share should only improve.   That said Q1/22 earnings were  4c/share USD and if just annualizedthis gives investors   .16c/share USD for FY 2022 earnings and if given a paltry 10x earnings is $1.60/share USD.   What if my assumptions are correct and DCS is able to grow their business at 50%+? What if Q1 2023 sees sales of $51.2M   Does the market give DCS a 30x, 40X or 50X P/E?.   Remember competitor Digi ($DGII) is currently trading at 100X PE. 

 

Now if we choose to just annualize Q1/2022 sales I believe the market will pay a P/E multiple of 30X.   This would equate to $4.80 USD which leaves for a potential upside of approximately a 400% share price gain if DCS just matches Q1/2022 sales for the rest of the year.   

 

What if DCS does grow their revenues by an additional $20m over the next 12 months and twelve month forward sales come in at $51.2m with margin improvement of 30%.   I don’t know for sure the raise amount or share dilution to come.  The bottom line is I could easily see the share price of $DCSI.C being multiples of the current price.    Lets stick to the $4.80 price target and let the company surprise us with increased revenue growth.

 

Now I have been accumulating shares and admit it’s not easy to buy without moving the share price.   I love it that a debenture financing is underway with earnings set to be released before closing.  The only way I can read into this is that management is confident in their future.  I fully expect insiders will participate in this debenture financing, especially the new directors who have just come on.