Printing and marketing services company DATA Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) announced the closing of its acquisition of R.R. Donnelley & Son's Canadian operations.
Company President Richard Kellam called the transaction, which is expected to more than double the company's revenue, a "significant milestone" for the company.
"As one company, we are now focused on driving growth and value creation by delivering consistent and seamless service to our customers and positioning DCM for sustainable and long-term success," Kellam said.
DCM is acquiring RRD's Canadian operations for CA$130.8 million. RRD Canada provides print and related services to thousands of customers across the country, had a revenue of about CA$250 million in 2022, and has 1,000 employees.
Chris Thompson of eResearch wrote, maintaining a Buy rating on the stock with a one-year price target of CA$4.50 per share.
The companies are "a perfect fit," Kellam has said. The transaction "combines two companies with complementary operating models and best-in-class products, (and) very strong customer relationships . . . There (are) many meaningful benefits for our clients and for our customers, being bigger and better together and obviously, attractive financial benefits, and value creation opportunities for DCM."
The Catalyst: Complementary Operating Models
Analyst Chris Thompson of eResearch, in a March research note, said the companies have complementary operating models.
"The consolidated firm is poised to offer enhanced value and innovation to its customers, while DCM anticipates that this deal will establish a long-term, sustainable enterprise that caters to Canadian and U.S. customers," Thompson wrote, maintaining a Buy rating on the stock with a one-year price target of CA$4.50 per share.
After the news broke in March that DCM's revenue had risen 20% YoY from 2021 to 2022, DCM's stock went from CA$2 to CA$2.15. Analyst Clive Maund of CliveMaund.com predicted a powerful upleg for the stock and rated it a Strong Speculative Buy.
Analyst Clive Maund of predicted a powerful upleg for the stock and rated it a Strong Speculative Buy.
The stock has continued to rise since then and was CA$3.17 on Tuesday.
"We believe this transaction enhances DCM’s capabilities and growth potential," Thompson wrote. "RRD Canada has a highly complementary operating model and is expected to add new products, services, and technology capabilities."
The new company would have about CA$520 million in annual sales from day one, an expanded customer base serving more than 400 enterprise clients, and an enhanced product portfolio, DCM said.
The company's new five-year strategic financial objectives are to grow annual revenues organically at a compounded annual growth rate (CAGR) of more than 5% per year, achieve adjusted EBITDA as a percentage of revenues of more than 14%, and reduce total net debt as a multiple of Adjusted EBITDA to less than 1.0x.
'Plenty of Upside Revenue Potential'
DCM the purchase price was CA$130.8 million cash through revolving credit and floating rate bridge facilities from a Canadian-chartered bank and a new CA$50 million fixed-rate credit facility from Fiera Private Debt.
Included in the purchase are three sites owned by RRD with an implied net value of about CA$30 million. DCM said it had entered a sale and lease-back arrangement for one of the sites and expects to realize net proceeds of about CA$23 million that will be used to substantially repay the bank bridge facility.
But "with the proliferation of video and digital content, the total DAM addressable market is forecasted to reach US$6 billion by 2025; thus, there is plenty of upside revenue potential," Thompson wrote.
DCM helps companies with branding, communications, and logistics and provides customer loyalty programs, data, and content management, location-specific marketing, labels and asset tracking, multimedia campaign management, and workflow management.
Its clients are in many industries, including financial services, health care, emerging markets, retail, non-profits, energy, hospitality, and transportation.
The tech-enabled marketing and digital asset management (DAM) sectors are forecasted to grow annually by 15% and 21%, respectively, Thompson said. DAM services generated only 1.3% of the company's revenue in 2020.
Streetwise Ownership Overview*
Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX)
But "with the proliferation of video and digital content, the total DAM addressable market is forecasted to reach US$6 billion by 2025; thus, there is plenty of upside revenue potential," Thompson wrote.
Ownership and Share Structure
Management and insiders own about 45% of DCM, including a share program that gives employees close to 4% ownership.
Top insider shareholders include Director Michael Sifton with 10.2% or 4.5 million shares, Board Vice Chairman Greg Cochrane with 7.43% or 3.28 million shares, Chairman of the Board J.R. Kingsley Ward with 5.54% or 2.44 million shares, and the CEO Kellam with 1.67% or 0.74 million shares, according to Reuters.
According to the company, the rest, 55%, is retail. Reuters lists KST Industries Inc. as the top shareholder in the company overall, with 11.69% or 5.15 million shares.
The company is covered by Noel Atkinson of Clarus Securities and Chris Thompson of eResearch. Newsletter writer Clive Maund also covers the stock.
It has a market cap of CA$144.53 million with 44 million shares outstanding, with 27.3 million shares free-floating. It trades in the 52-week range of CA$3.39 and CA$1.01.
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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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