DATA Communications Management has a 73 per cent upside, says Clarus

Clarus Securities analyst Noel Atkinson is staying bullish on DATA Communications Management (DATA Communications Management Stock Quote, Charts, News, Analysts, Financials TSX:DCM), saying in a Friday report that the stock offers inflation protection along with solid revenue growth.

Brampton-based DATA Communications, which has corporate printing, marketing and communication services for private and government agencies, announced on Thursday the sale and leaseback of its Oshawa, Ontario, warehouse facility which was acquired as part of its RR Donnelley Canada (RRDC) acquisition of earlier this year. 

Net proceeds from the deal were $23.1 million. DCM had obtained a $30 million term loa with a Canadian Tier-1 bank to buy three RRDC properties, in Oshawa, Fergus and Trenton as part of the RRDC acquisition, and the proceeds from the sale-leaseback have been applied to that term loan to reduce the principal to about $7 million. DCM said it will be using the Oshawa facility as a primary warehousing site for its Eastern Canada business.

Atkinson said management will likely be looking for opportunities to monetize the other two facilities and he expects to see at least a modest gain on the Fergus and Trenton properties if sold or entered into a sale-leaseback.

He said DCM’s debt should now be below $120 million or about 1.6x net debt/2024 adjusted EBITDA, which he called “a rather conservative level” for a large and profitble business like DCM.

“We do expect a modest increase in net debt over the next few quarters as merger integration accelerates and the Company pays for severance, equipment moving between facilities, and closing of certain facilities, but free cash flow should return in earnest by Q1/24,” Atkinson wrote.

Atkinson reiterated a “Buy” rating on DATA Communications and $5.00 target price, which at the time of his report’s publication represented a projected one-year return of 73 per cent.

Looking ahead, the analyst is expecting DCM to generate 2023 revenue and adjusted EBITDA of $455.5 million and $49.4 million, respectively, and 2024 revenue and EBITDA of $560.2 million and $73.1 million, respectively.

“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 passthroughs, and further potential torque if the Company gets traction with new high-margin subscription-based enterprise cloud offerings now entering the market. We maintain our Buy rating,” he said.