Industrial Alliance Securities analyst Dylan Steuart says he’s been a long time fan of DH Corp. (TSX:DH), but following a Q3 miss he is pressed to find short term positives for the cheque processing and banking tech player.
On Tuesday, DH Corp reported its Q3, 2016 results. The company earned $16.6-million on revenue of $417.7-million, a topline increase of just 0.6 per cent.
“Our results in the quarter reflected an accelerated decline in Canadian cheque volumes, as well as delayed IT purchase decisions among large banks, most notably those outside the United States,” said CEO Gerrard Schmid. “We observed in the second quarter, and saw more visibly in the third quarter, a more cautionary stance among these institutions in light of broader economic conditions, and we anticipate this may continue into 2017. However, we remain very encouraged by our growth prospects, especially in payments, as evidenced by the number and maturity of deals in which we are actively engaged.”
Steuart notes that DH’s third quarter earnings missed his and the consensus estimates across the board. He was expecting the company would generate EBITDA of $128-million on a topline of $427-million, but the company posted EBITDA of $109.6-million on the aforementioned topline of $417.7-million. He says fears of a Canada Post strike and customers switching to electronic payments appear to be the major culprits of weakness in the Canadian market. Overall, he says, chequing volumes appear to have hit a “tipping point”. The analyst says the picture on DH Corp is now a cloudy one.
“We have long held a favourable view of DH’s operations due to strong market leading positions in several business lines, a high portion of recurring revenues (79%), and strong cash flow generation,” says Steuart. “However, it remains difficult to see how positive momentum can be generated in the short term until a clearer picture on 2017 revenue development emerges. Given the degree of variance from our estimates in the quarter and the reduced outlook for GTBS and the Canadian segments we are reducing our adjusted EBITDA estimate for 2017 to $486M (from $559M) and our EPS estimate to $2.33 (from $2.85).”
In a research update to clients yesterday, Steuart cut his rating on DH Corp to “Hold” from “Strong Buy” and reduced his one-year price target on the stock to $32.00 from $46.00.