Data Communications Management Corp DCMDF

Clarus target raise on acquisition close - cantechletter.com

[Possibleidiot01]

By Jayson MacLean Published on April 25, 2023 Last Updated on April 25, 2023 Filed under:   All posts, Analysts Stock:   dcm

DATA Communications Management scores target raise from Clarus

Printing services stock DATA Communications Management (DATA Communications Management Stock Quote, Charts, News, Analysts, Financials TSX:DCM) just got a big target raise from Clarus Securities on the back of a new acquisition, one which nearly doubles revenue for the company. In a Tuesday report, Clarus analyst Noel Atkinson said the deal gives DCM a strong moat along with potentially $20-25 million in annualized cost synergies.

 

Brampton-based DATA Communications Management, which has corporate printing and technology services serving thousands of clients, including many of Canada’s 100 largest company’s and government agencies, closed on Tuesday on the previously-announced acquisition of the Canadian operations of RR Donnelley & Sons (RRDC) for a cost of $130.8 million. 

The company says the acquisition will give DCM a significantly larger presence in the Canadian market and pro forma revenues of over $520 million in 2022 (DCM’s revenue alone for 2022 was $273.8 million).

“We believe this is a compelling strategic opportunity to accelerate our growth agenda by leveraging our expanded portfolio of best-in-class products and services, stronger execution capabilities, and enhanced speed to market for new innovations,” said DCM President and CEO Richard Kellam in a press release.

DCM’s share price shot up on the initial announcement of the proposed acquisition and, concurrently, the company’s fourth quarter report on February 22. The stock had been in the $1-$1.50 range for almost two years but is currently above $3.00 per share.

Atkinson sees more upside with the closing of the deal and has raised his target from $3.00 to $5.00, representing at the time of publication a projected one-year return of 56 per cent.

 

“We see the combined business having the scale and technological platform to create a sustainable economic moat within the Canadian corporate printing sector,” Atkinson said.

“Moreover, we see a path towards a medium-term (perhaps 2028-2029e) price target of $16.00/share if DCM can reach $1 billion/year of revenues over that timeframe via sustained organic growth and tuck-in acquisitions,” he said.

On the numbers, Atkinson is now calling for DCM to deliver $451.7 million in 2023 revenue and $554.8 million in 2024. On earnings, the call is for adjusted EBITDA of $50.4 million in 2023 and $69.8 million in 2024.

Atkinson noted that RRDC brings with it about 250 enterprise customers, half of which are brand-new to DCM and the other half bring further breadth and depth.

[lscfa]

How can there be $25-$25 mil in cost savings and ebitda margins decrease? Is the analyst's estimate low or is RRD a profitless co?    rev ebitda margin         q4 22 73.045 11.34 15.5% 2022 273.804 38.254

[Torontojay]

His numbers don't add up.  First of all, $20-25m in cost savings should add about 4%-5%  to ebitda margins; I.e $20m/$520m =~ 3.84% , $25/$520 =~ 4.8%  Pro firma revenue is $520m for the combined companies.  According to the analyst, revenue for 2023 would be $451.7m and ebitda of $50.4m which is due to the fact that the acquisition didn't close at the start of

[lscfa]

I suspect RRD ebitda is very weak. That's why DCM did not disclose it when acquisition was announced like most co.s do.  If mgmt was afraid they could have disclosed ebitda after synergies like some co.s do.....   2022 DCM RRD Combined Revenue 273.8

[Torontojay]

I also come to the same conclusion that Rrd ebitda margins are weak and net income is almost certainly negative. The company is probably banking on the cost savings to boost margins going forward and hopefully net income.  If I recall from memory, Rrd international had about 8% ebitda margins and I suspect the margins for the Canadian  business acquired to be lower than that. 

[SidelineSitter]

In the SmallCap Discoveries YouTube video that was just posted, Richard and James mentioned that RRD has around 20% margins and that the Canadian division numbers were comparable to that.

[Torontojay]

They paid a 4.5 times multiple on the $93m acquisition price (after sale and leaseback) implies ebitda to be $20m.  Ebitda margins = $20m/$250 =~ 8 %   

[Torontojay]

Hi SidelineSitter.  They are definitely targeting 18-20% ebitda margins and the combined business today is about ~ 11% margins. Add on $20-$25m in cost savings takes that to 15-16% range. The company can further reduce their sg&a costs, improve gross margins and now it is easy to see a path to 18-20% ebitda margins.   

[lscfa]

RRD has 20% gross margins, DCM has 30%. Maybe Clarus analyst assumes RRD increases gross margins to 30% => $250 mil revenue x 10% improvement = $25 million synergies

[Torontojay]

It's worth noting that RRD has 1000 employees and achieved revenue of ~$250m.  Dcm has 910 employees and ~ $270m.  Rrd can further reduce their sg&a as DCM has revenue per employee of ~ $300k compared to Rrd which has revenue per employee of $250k.  Rrd can effectively bring down their employee count to ~ 810 employees to be in proportion with DCM and it would

[lscfa]

in the latest presentation it was said that DCM acquired RRD for 4.5x ebitda based on the $93 mil price (excludes $30 mil real estate sale). The bozos should have put this in the NR so investors are guessing wrong about metrics.     2022 DCM RRD Combined Revenue 273

[KnowledgeSeekr8]

I would say bozos is quite harsh considering the turnaround they have executed....

[lscfa]

Bozos because the disclosure in the NR about the deal was piss poor.

[lscfa]

This is how you disclose acquistions.... Transaction Highlights Establishes Quipt as a leading respiratory-focused home medical equipment suppliers in the United States with significant scale, serving 270,000 patients with 32,500 referring physicians across 115 locations in 26 states. The combination of Quipt and Great Elm has a combined Annualized Revenue (defined below) and Annualized