Equity Research firm, eResearch Corp. (www.eresearch.com), recently published a 10-page update Equity Research Report on DATA Communications Management Corp. (TSX: DCM | OTCQX: DCMDF) about the Company’s recent announcements to acquire the Canadian operations of R.R. Donnelley & Sons Company (RRD) and preliminary full-year financial results for 2022.
DCM is a Canadian-based provider of marketing and business communication solutions to companies in North America. Its technology-enabled content and workflow management capabilities solve the complex branding, communications, logistics, and regulatory requirements of leading enterprises, so they can accomplish more in less time.
In February, DCM announced that it agreed to acquire the Canadian operations of RRD for a cash purchase price of C$123 million. The acquisition is expected to close in the second quarter of this year and it is subject to customary closing conditions and receipt of third-party and regulatory approvals, including those required under the Canadian Competition Act.
DCM intends to finance 100% of the purchase price through fully committed credit facilities from a Canadian chartered bank and Fiera Private Debt. As part of the deal, DCM will acquire three sites currently owned by RRD Canada at an implied value of approximately C$30 million. Following the closing of the deal, DCM intends to enter into a sale and lease-back arrangement for each site.
In 2022, RRD Canada generated approximately $250 million in revenue with 10 locations across Canada and 1,000 employees. RRD Canada provides print and related services to thousands of customers across Canada, including financial institutions, governments, insurance companies, retailers, transportation companies, and other regulated industries. In comparison, DCM guided that its revenue in 2022 should be in the range of $270 million to $274 million and has approximately 910 employees.
In the update report, eResearch reported that it believes this transaction enhances DCM’s capabilities and growth potential. RRD Canada has a highly complementary operating model and is expected to add new products, services, and technology capabilities.
In addition, RRD Canada adds more than 250 Enterprise clients to DCM’s existing 280 Enterprise clients to create an Enterprise customer pool of over 400 clients, net of overlap, which will be ripe for cross-selling opportunities. The new clients add scale to DCM’s marketing workflow technology platform, DCMFlex, and its digital asset management platform, ASMBL.
RRD Canada also brings an experienced team that compliments DCM’s team and the combined organization would benefit from the rationalization of the workforce across the combined 21 locations. eResearch wrote that it believes the deal should be accretive to DCM’s financial profile as it accelerates DCM’s revenue and EBITDA growth, and diversifies its revenue base.
Also in February, DCM reported preliminary full-yearfinancial results for 2022 with revenue in the range of $270 million to $274million, a 15% to 16.5% increase compared with 2021, Gross Profit in the rangeof 30.5% to 31%, a 20% to 21% increase compared with 2021, and EBITDA in therange of $35.5 million to $36.5 million. Total revenue for 2022 was higher thaneResearch’s estimate of $265.3million but the other metrics released were in-line and, overall, eResearch believed this was positive forthe company.
Based on eResearch’s model estimates, DCM has a low valuation multiple compared to its peers. The company is currently trading at 0.6x 2022 Enterprise Value to Revenue (“EV/Revenue”) compared with printer comps trading at 0.9x EV/Revenue and well below the Digital Asset Management (DAM) and Tech-Enabled Workflow providers trading at 3.2x and 1.2x EV/Revenue, respectively.
Chris Thompson, Director of Equity Research of eResearch wrote, “DCM reported two events recently that were both positive for the Company valuation according to our model” and “DCM continues to trade at multiples below the low end of its industry comps and highlight the potential for DCM’s share price appreciation.”
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