15 Mar

Data Communications Co. To Buy Printing Firm

March 15, 2023

Source: Chris Thompson  (3/14/23)

The strategic merger between these two Canadian entities should enhance the acquirer’s “capabilities and growth potential,” noted an eResearch Corp. report. 

Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) agreed to acquire the Canadian operations of R.R. Donnelley & Sons, called Moore Canada (RRD Canada), for CA$123 million (CA$123M), which should provide beneficial synergies, reported eResearch Corp. analyst Chris Thompson in a March 10 research note. The transaction should close in Q2/23.

“We believe the deal will be accretive to Data Communications Management’s financial profile as it accelerates [the company’s] revenue and EBITDA growth and diversifies its revenue base,” Thompson wrote. “It could help accelerate sales growth, lower some organizational costs, and enhance operational efficiency, which could lead to an improved overall financial performance.”

In other news, the analyst reported Data Communications reported strong preliminary full-year 2022 (FY22) financial results, noteworthy for higher-than-expected revenue as well as year-over-year (YOY) increases in revenue, gross profits, and EBITDA.

Boosts to Target Price

Thompson highlighted that the merger and strong FY22 are “positive for the company valuation, according to our model.” Incorporating last year’s revenue increases eResearch’s target price on Data Communications to CA$4.59 per share, whereas accounting only for the acquisition takes it to CA$5.92 per share. Combining both raises it to CA$6.02 per share.

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Data Communications is rated Buy.

The private equity investment firm, however, plans to keep its target price as is, now CA$4.50 per share, until the merger closes or final FY22 financial results are released.

Compared to the current CA$4.50 per share target price, this provider of marketing and business communication solutions is currently trading at about CA$2.06 per share, noted Thompson. This price difference implies significant potential gains for investors. Data Communications is rated Buy.

Impacts of the Deal

Thompson highlighted the acquisition should boost Data Communications’ capabilities and growth potential given RRD Canada’s “highly complementary” operating model and the expectation RRD Canada will bring online more products, services, and technological abilities.

RRD Canada provides print and print-related services to thousands of Canadian customers through 10 locations and with 1,000 employees. Last year, RRD generated about CA$250M in revenue. With the merger, Data Communications will be able to offer RRD’s services and solutions to its existing customers and take advantage of cross-selling opportunities.

According to the terms of the share purchase agreement, Data Communications will acquire three RRD Canada-owned sites at an implied value of about CA$30M. After closing, Data Communications plans to pursue a sale and leaseback agreement for each of these locations.

The acquisition would take Data Communications’ 16 locations to 21 and its number of enterprise clients to 400-plus from 250. These additional clients would add scale, for instance, to Data Communications’ marketing workflow technology platform, DCMFlex, and its digital asset management platform, ASMBL.

Snapshot of 2022 Finances

For FY22, Data Communications reported preliminary revenue of between CA$270M and CA$274M. This is higher than eResearch’s estimate of $265.3M and reflects a 15–16.5% increase over FY21 revenue.

Similarly, gross profit last year was between 30.5% and 31%, up 20–21% from that in FY21. FY22 EBITDA was between CA$35.5M and CA$36.5M, a 41–45% YOY increase.

Total debt, net of cash, down dropped about 35% from 2021’s amount. Data Communications plans on paying for the acquisition of RRD entirely through committed credit facilities noted Thompson.

Data Communications is scheduled to release full financial FY22 results on March 21, 2023, and hold an investor call and webcast the next day.

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Disclosures:

1) Doresa Banning wrote this article for Streetwise Reports LLC as an independent contractor. They or members of their household own securities of the following companies mentioned in the article: None. They or members of their household are paid by the following companies mentioned in this article: None.

2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: Data Communications Management Corp. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.

3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.

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Disclosures for eResearch, Data Communications Management Corp., March 10, 2023

ANALYST ACCREDITATION

eResearch Analyst on this Report: Chris Thompson CFA, MBA, P.Eng. Analyst Affirmation: I, Chris Thompson, hereby state that, at the time of issuance of this research report, I do not own common shares, share options, or share warrants of DATA Communications Management Corp. (TSX:DCM).

eRESEARCH DISCLOSURE STATEMENT

eResearch is engaged solely in the provision of equity research to the investment community. eResearch provides published research and analysis to its Subscribers on its website (www.eresearch.com), and to the general investing public through its extensive electronic distribution network and newswire agencies. eResearch makes all reasonable efforts to distribute research material simultaneously to all of its Subscribers. eResearch does not manage money or trade with the general public, provides full disclosure of all fee arrangements, and adheres to the strict application of its Best Practices Guidelines. eResearch accepts fees from the companies it researches (the “Covered Companies”), and from financial institutions or other third parties. The purpose of this policy is to defray the cost of researching small and medium-capitalization stocks which otherwise receive little or no research coverage.

DATA Communications Management Corp. paid eResearch a fee to have it conduct research and publish reports on the Company for one year.

To ensure complete independence and editorial control over its research, eResearch follows certain business practices and compliance procedures. For instance, fees from Covered Companies are due and payable before research starts. Management of the Covered Companies is sent copies, in draft form without a Recommendation or a Target Price, of the Initiating Report and the Update Report before publication to ensure our facts are correct, that we have not misrepresented anything, and have not included any non-public, confidential information. At no time is management entitled to comment on issues of judgment, including Analyst opinions, viewpoints, or recommendations. All research reports must be approved, before publication, by eResearch’s Director of Research, who is a Chartered Financial Analyst (CFA).

All Analysts are required to sign a contract with eResearch before engagement and agree to adhere at all times to the CFA Institute Code of Ethics and Standards of Professional Conduct. eResearch Analysts are compensated on a per-report, per-company basis and not based on his/her recommendations. Analysts are not allowed to accept any fees or other considerations from the companies they cover for eResearch. Officers, analysts, and directors of eResearch are allowed to trade in shares, warrants, convertible securities, or options of any of the Covered Companies only under strict, specified conditions, which restrict trading 30 days before and after a Research Report is published.


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