DATA Communications Management is a buy, Clarus says

Clarus Securities analyst Noel Atkinson has a definitive vision for DATA Communications Management (DATA Communications Management Corp Stock Quote, Chart, News TSX:DCM), having initiated coverage on the company with a “Buy” rating and target price of $2.50/share for a projected return of 93.8 per cent.

Based in Brampton, Ont., DCM is a printing and marketing services organization, with a client base of over 2,500 in Canada and the United States, including 70 of Canada’s 100 largest corporations, as well as three of the five largest government agencies.

In 2019, the company started to shift its sales emphasis toward its tech-enabled, higher-margin remote workflow portal called DCM Flex, which now drives about 30 per cent of the company’s revenue mix, with an aim toward rolling out the solution to its largest and most profitable customers. Though the company’s total revenue has declined in the last three years, the gross margin has gone up significantly, with Atkinson setting a projection of approximately 30 per cent for the full 2021 results.

“DCM Flex solutions are particularly attractive for companies that have many branches or stores with common corporate branding but needing localized/personalized content,” Atkinson said. “Many of these locations are only now entering a full reopening phase, which in turn should drive a resurgence in printing demand.”

Of particular interest to Atkinson is ASMBL, the company’s first foray into a subscription-based cloud services to make marketing workflows easier to handle, with its first deployment at a major Canadian retailer announced late in 2021. Furthermore, the company has indicated that its ASMBL sales pipeline had already reached $5 million per year of high-margin subscription-based revenue.

The company has had a productive start to 2022, having been named a Principal Sponsor for Ryerson University’s Digital Asset Management event series, which includes workshops and a national conference, as well as having been selected as having been selected to help a U.S. cannabis company automate its marketing workflows through the use of the DCM Flex platform, as well as the company’s content creation software.

“The fragmentation of the cannabis market presents considerable marketing and production challenges that DCM can help solve,” said Shelly Anwyll, SVP, North America, Emerging Markets in a January 17 press release announcing the details of the U.S. cannabis agreement. “We were really empowered to dig deep in our tool kit and craft a solution that now touches so many aspects of their business. It’s a true marriage of tech and manufacturing excellence—a complete conception-to-execution solution that will scale and grow alongside their business. And with DCM’s support as sole execution partner, they’ll have fewer vendors to manage.”

With fourth quarter financial results still to come, Atkinson forecasts the company to end 2021 with another loss in revenue at $234.2 million compared to the $259.3 million reported in 2020, with Atkinson believing the 2021 figure is where the company will bottom out. Looking ahead, Atkinson projects minimal growth to $239.4 million in 2022 for potential year-over-year growth of 2.2 per cent, while his 2023 projection is set at $250.7 million for a potential year-over-year increase of 4.7 per cent.

In terms of valuation, Atkinson foresees a constant Price/Sales multiple of 0.3x from 2021 through 2023 for the company. Meanwhile, the analyst forecasts some compression in the company’s adjusted EBITDA margin, including a drop from $41.5 million and an implied margin of 16 per cent in 2020 to a projected $32.1 million and implied margin of 13.7 per cent in 2021. The compression continues in Atkinson’s 2022 projection of $28.6 million for an implied margin of 11.9 per cent, though Atkinson projects a slight rebound in 2023 to $33 million for an implied margin of 13.2 per cent.

From a valuation perspective, Atkinson forecasts the company’s EV/adjusted EBITDA multiple to rise from 4.5x in 2021 to 5x in 2022, then dropping to a projected 4.3x in 2023.

Overall, Atkinson believes a subscription-based service could be a valuation catalyst moving forward, particularly when it could carry a gross margin greater than 80 per cent. In particular, Atkinson’s optimism is buoyed by the fact that comparable stock Mediavalet has a $55 million valuation despite bringing in less than $10 million of annual revenue and reporting an annualized EBITDA loss of $8 million.

“We look at the new DAM platform as an in-house tech startup leveraging DCM’s decades of related experience and with 2,500 existing corporate customers to target,” Atkinson said. “Having the solution bundled with printing and digital output should be a major differentiation from competitors that are just software providers.”

DATA Communications Management has seen its share price driven up by 71.3 per cent over the last 12 months, while also producing a seven per cent return since the start of 2022. The stock’s value started climbing after hitting a 52-week low of $0.63/share on April 14, eventually reaching a 52-week high o $1.48/share on June 26.