Dye & Durham Limited (TSX: DND) is a Canada based company which offers business support services to organizations, government, and private firms through its cloud-based platform. The group offers legal services like due diligence, securities filings, litigation solutions, investigative services, court filing, KYC services, and financial risk management services.

Key Updates:

• Impressive Profitability Growth: The company reported consistent increase in its profitability, supported by improved cost structure along with higher revenues. Notably, quarterly adjusted EBITDA stood at CAD 66.8 million, which is the highest in the last five quarters. Moreover, Adjusted EBITDA on LTM basis also surged to CAD 240.9 million in Q3FY22, which is higher than CAD 116.4 in FY21. This indicates strong profitability despite the ongoing sluggish economic scenario.

Source: Company Presentation 

• Positive Sectoral Scenario: The company operates through the cloud-based services, and the demand has surged exponentially in the recent past sue to changing dynamics like higher work from home culture, enhanced security requirements across several corporates etc. We believe, the demand is likely to remain elevated in the coming days due to the rising dependence on data-storage services across the globe.

• Surge in cash flows: In first nine months of FY22, the company reported its net cash from operations of CAD 126.4 million, significantly higher than CAD 41.7 million in pcp. This was primarily due to higher net income of CAD 11.0 million in Q1FY22 v/s a net loss of CAD 47.1 million in pcp. This is expected to support the overall liquidity of the company.
  

Risks Associated with the Investment:

The company’s products require constant upgradation, and hence might face cost pressure due to rising input costs. This would lead to margin contraction, loss of clients due to fierce competition etc. 

Q3FY22 Financial Highlights:

Q3FY22 Income Statement Highlights (Source: Company Report)

• DND announces its Q3FY22 result, wherein the company posted revenue of CAD 122.8 million, significantly higher than CAD 68.9 million in pcp. The surge was primarily driven by strong growth from all the geographies.
• The company reported a surge in direct costs, significantly higher technology & operations expense and a rise in sales & marketing expenses. Amortization and depreciation expense stood higher at CAD 36.2 million v/s CAD 17.0 million in pcp. This was partially offset by net lower finance costs, which partially supported the profitability.
• The company posted a net loss of CAD 7.0 million v/s a net loss of CAD 10.6 million in pcp. The loss was primarily due to higher input costs as mentioned above.

Valuation Methodology (Illustrative): Price to Earnings based

Analysis By Kaline Group

Stock Recommendation:

For nine-months ended FY22, the company reported a net income of CAD 11.0 million, as compared to a net loss of CAD 47.1 million in pcp. This was supported by higher income along with a decline in the finance costs.  We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Open Text Corp, Enghouse Systems Ltd etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of DND at the last closing price of CAD 21.85 on June 14, 2022.

One-Year Technical Price Chart (as on June 14, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

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