Communications Co. To Show Fruits of Major Acquisition

Print and marketing services company Data Communications Management Corp. (DCM:TSX; DCMDF:OTCQX) is working hard to combine two businesses after acquiring a competitor.

This month, the company will get to show off the results with its first reporting of combined finances since closing on the purchase of R.R. Donnelley & Sons' Canadian operations, Moore Canada Corp., in the second quarter.

The new company was predicted to have about CA$520 million in annual sales, an expanded customer base serving more than 400 enterprise clients, and an enhanced product portfolio, DCM has said.

DCM said it expects to generate CA$25 million to CA$30 million in synergies between the former rivals annually.

In the first quarter, DCM reported revenues were up 9.8% or CA$6.8 million over the same quarter in 2022 for total revenues of CA$76.1 million. The company's gross profit accelerated by 16.3% or CA$3.3 million for a total of CA$23.7 million, and gross profit as a percentage of revenues grew from 29.3% to 31.1% during that period.

"DCM plans to accelerate its growth by capitalizing on an expanded range of products and services, better execution capabilities, and improved time-to-market for new offerings," Chris Thompson of eResearch Corp. wrote.

But the Moore acquisition was not included in these numbers, so the second quarter will be the first time DCM will report on the combined business.

The acquisition is "an important milestone" for the company, noted analyst Chris Thompson of eResearch Corp. in a June 14 research note.

It provides "an opportunity to build a better and much bigger business with a larger presence in the Canadian market," wrote Thompson, who increased his one-year price target on the stock from CA$4.50 per share to CA$6.90.

"DCM plans to accelerate its growth by capitalizing on an expanded range of products and services, better execution capabilities, and improved time-to-market for new offerings," Thompson wrote.

The Catalyst: Growing Revenues

The purchase price of CA$130.8 million cash for Moore came 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, the company said.

Included in the purchase were three sites owned by Moore with an implied net value of about CA$30 million. DCM said it had closed a sale and lease-back arrangement for one of the sites for CA$23.1 million.

Clarus Securities analyst Noel Atkinson maintained his Buy rating on DCM with a target price of CA$5 per share.

The company also raised CA$26.1 million in gross proceeds from a brokered private placement of about 8.7 million shares at CA$3 per share.

Clarus Securities analyst Noel Atkinson said the equity raise improves DCM's leverage ratio and "provides a buffer for funding the integration efforts (severance, closing facilities, moving equipment). We understand that management has been trying to balance the timing of merger integration efforts with cash flow."

Atkinson maintained his Buy rating on DCM with a target price of CA$5 per share.

"DCM shares offer exposure to solid revenue growth, one of the largest and most diversified corporate client bases in Canada, some inflation protection via contractually permitted input cost pass-throughs, and further potential torque if the Company gets traction with new high-margin subscription-based enterprise cloud offerings under development," Atkinson wrote.

'Long-Term Returns'

Sadif Investment Analytics ranked DCM in the 90th percentile overall when analyzed for quality, safety, and sentiment, it reported in a May 17 summary due diligence report.

"Data Communications is a high-quality company," Sadif wrote. "We believe [it] to be a good long-term investment that is likely to deliver long-term returns."

"Data Communications is a high-quality company," Sadif wrote. "We believe [it] to be a good long-term investment that is likely to deliver long-term returns."

The company scored 92 out of 100 on Sadif's Summary StockMarks' ratings. This is calculated by and reflects how Data Communications is stacked up against the entire population of 2,248 Canada-listed companies rated today on a dozen metrics at market close on May 17, 2023.

Sadif rates the Canadian firm company Good and recommends it as a Buy with a target price of CA$5.37 per share.

After the news broke in March that DCM's revenue had risen 20% YoY from 2021 to 2022, analyst Clive Maund of CliveMaund.com predicted a powerful upleg for the stock and rated it a Strong Speculative Buy.

DCM's five-year plan had been to grow revenue to CA$300 billion, and the new acquisition helps the company exceed that. Lorimer said the new five-year plan is to reach CA$1 billion in revenue.

Digital Asset Management (DAM) Market Expanding

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 has said.

DAM services generated only 1.3% of the company's revenue in 2022, 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 and MCC have "overlapping facilities" that would benefit from consolidation, Thompson wrote.

"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," he wrote.

Ownership and Share Structure

Management and insiders own 31% of DCM, including a share program that gives employees close to 3% ownership.

Top insider shareholders include Director Michael Sifton with 9.2%, Board Vice Chairman Greg Cochrane with 6.3%, Chairman of the Board J.R. Kingsley Ward with 4.4%, and CEO Kellam with 1.4%, according to the company.

The rest, about 69%, is retail. KST Industries Inc. is the top shareholder in the company overall, with 9.4%.

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$149.81 million with about 55 million shares outstanding. It trades in the 52-week range of CA$3.81 and CA$1.08.

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Important Disclosures:

1. Data Communications Management Corp. is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000.
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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