DATA Communications Management Stock: A Microcap Bargain | Panda Anku

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DATA Communications Management Corp. (TSX:DCM:CA) (OTCQX:DCMDF) (“DCM”) is currently undergoing a transition from a print first to a digital first company. It’s not just the company’s traditional marketing business that’s starting to recover from COVID, but its profitability will continue to grow as management implements its cost-cutting plan. If management only implements its plan to reduce overhead by “$11.4 million annually” and excludes the additional margin expansion to be achieved through digitization, a projected FCF yield of >50% (based on of the company’s current market capitalization) can be achieved by adding this number to the company’s normalized FCF. Furthermore, a calculation of the company’s normalized FCF without margin expansion implies a <3 FCF multiple on the current share price. Although the company's balance sheet is far from ideal, it has sufficient lines of credit to draw on to meet any liquidity needs that may arise. Considering DCM's valuation, its recovery and future prospects, it is clear that it may be undervalued.

background

DATA Communications Management Corp. (DCM) is an enterprise communications solutions company with operations throughout North America. In addition to marketing, the company also offers warehousing and freight services. DCM’s marketing business was particularly hard hit by the pandemic, with revenue down 8.3% and 9.2% in 2020 and 2021, respectively. But even in 2019, the company posted a 12.4% drop in revenue. The challenge of 2019 was largely due to the failed rollout of the company’s enterprise resource planning (ERP) system. This caused a “daily level of disruption” that led to operational difficulties. What is notable, however, is that in the first five months of 2019, prior to implementing the ERP system, DCM generated over $45 million in revenue from lifetime contracts, reduced SG&A expenses, and managed to incur long-term debt settle However, these results have been overshadowed by the post-ERP era. Since then, the company has initiated a turnaround to digitize its marketing business and reduce costs.

Earnings, Revenue and FCF

Before the failed ERP system rollout and the pandemic, DCM’s revenue, although declining in 2016, was growing at 5.2% per year. Sales peaked in 2018 at $322.77 million. While EBITDA declined in 2016, it increased by 18.3% and 31.7% in 2017 and 2018, respectively. This demonstrates not only the company’s increasing profit margins, but also the operational leverage inherent in DCM’s business. The company’s FCF from 2016 to 2018 was approximately $8 million. However, the company’s FCF peaked during the pandemic in 2020 at $47 million. The company also managed to produce US$25 million in FCF in 2021. While the company’s historical FCF has been meager, its most recent FCF brings the average to $15.7 million. Those FCF gains are largely the result of the company’s turnaround efforts to digitize its marketing business and cut costs.

margin expansion

While the company suffered from the pandemic and its revenue fell 11% during the pandemic, its margins actually increased. In 2021, the company’s gross margin improved by 1.4% despite the drop in sales. This was achieved primarily by “realizing the full benefits of cost savings initiatives implemented in 2020 and 2021 [and] improved management of purchase inventory and other direct costs” along with improved pricing. It should be noted that temporary and permanent layoffs caused by the pandemic also boosted margins amid operational challenges caused by the pandemic. While a 1.4% improvement in gross margin isn’t in and of itself proof of a successful turnaround, it does show management’s commitment to cutting costs, even amid long-term difficulties.

Amid the revenue shortfalls caused by the pandemic, the company managed to improve EBITDA along with improvements in gross margin. Despite the aforementioned 8.3% drop in 2020 revenue, the company’s EBITDA increased by $13.42 million to $21.63 million, even exceeding 2021’s EBITDA of $19.93 million -Dollar. The Company subsequently and predictably recorded a modest EBITDA decline of $3.44 million in 2021 as the Company’s business in 2021 was negatively impacted primarily by COVID. The company’s LTM EBITDA is currently $26.38 million and management’s Adjusted TTM EBITDA is $35.6 million. In early 2021, the company “expects annual savings of $11.4 million,” which is yet to be fully realized. Assuming $11 million in overhead savings regardless of the company’s expected higher revenue from digitization, adding to the company’s pre-pandemic FCF of $8 million would give investors a Enjoy FCF returns (based on the company’s current market cap of $43 million). of 43%.

The company’s LTM EBITDA is at a level that beats the reported figure of $26 million. The company’s EBITDA was $7.87 million for the first quarter and $7.85 million for the second quarter. “This is the highest ‘clean’ quarterly EBITDA we have reported in MANY years,” said management. On an annual basis, this would amount to $31.44 million. Given that the company’s investments averaged $1.8 million from 2016 to 2021, the company’s interest expense is approximately $6 million and taxes are less than $4 million per year, if one believes that the EBITDA figures achieved in 2022 are sustainable. FCF of $20 million could be within DCM’s ability to produce. However, DCM’s LTM FCF is only $10.8 million, primarily due to changes in accounts receivable and inventories. Additionally, the company’s merger and restructuring costs appear to be largely a pipe dream as it “had ZERO restructuring costs this quarter and no other one-time, non-recurring costs or adjustments [and its] The current outlook calls for ZERO restructuring charges for the remainder of the year.” However, to be cautious, even if DCM achieved an FCF of just $15 million, investors would receive a 35% FCF yield based on the The company’s current market capitalization of $43 million.

risks

DCM is currently $61.35 million in debt. In addition, it has $49.84 million in current liabilities against $60.14 million in current assets, of which $44.38 are receivables. Net property, plant and equipment is reported at $32.55 million. However, DCM’s tangible book value is still negative at minus seven cents per share. Management is explicitly committed to paying off debt, and its actions speak for it. Since 2019, the company’s debt burden has decreased by $49.6 million. While my conservative estimate of normalized FCF is $15 million, DCM’s debt could become negligible in less than two years if DCM could reproduce FCF around 2020 and 2019 levels. Additionally, DCM’s revenue hasn’t been able to return to pre-pandemic levels because its sales pipeline is only about $10 million. from Q4 2021. The transition of the marketing business could lead to further operational mismanagement similar to that of the failed roll-out of the ERP system in 2019. While DCM’s turnaround appears to be succeeding, its debt, so-so sales pipeline, and more misguided operational efforts could threaten its business.

valuation

The current market cap of DATA Communications Management Corporation is $43 million. His average FCF since 2016 is $15.7 million, and my most conservative estimate of his forward normalized FCF is $15 million. In addition, the digitization of the marketing business and the successful ongoing commitment to reducing costs should further increase the FCF. Its average unlevered FCF multiple (using LTM interest expense) is 4.9 and its normalized FCF yield is 35%. If FCF returned to its $36 million average during the pandemic, the FCF return would be 84%. Put simply, if revenue didn’t recover and margins didn’t keep growing, DCM would be incredibly cheap, and if revenue did recover and margins keep growing, investors could potentially see a >50% FCF yield on the current market cap enjoy the company. While such numbers may seem unrealistic, the reasons for this apparent mispricing become apparent when considering the undercover nature of this security.

Conclusion

DCM is a communications company that has seen a decline in sales since 2019, triggered by its ERP system and continued by the pandemic. However, the company’s turnaround and promise to move from a “print first” to a “digital first” company appears to be succeeding. In 2022, not only have sales recovered, but margins had already increased during the course of the pandemic. When the operational leverage of the business is taken into account, it is a reasonable assumption that such margin expansion will result in asymmetric returns for investors. While DCM’s balance sheet isn’t ideal, management’s track record of paying down debt has made the debt burden, while still high, benign for the company. Finally, given the nature of its small market cap, DCM’s valuation is obviously unjustified. In summary, the secular tailwinds of digitization, margin expansion, and egregious undervaluation have all emerged from DCM’s obscurity to create a tremendous opportunity, in my opinion.

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