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.
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 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).
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