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 Q3FY22. Moreover, Annual Adjusted EBITDA also surged to CAD 240.9 million in Q3FY22, which is higher than CAD 116.4 in FY21.

Source: Company Report

• Strong cash flow generation: The company reported a higher cash flow from its operating activities of CAD 126.4 million in 9MFY22 v/s CAD 41.7 million in pcp. This was primarily due to a net income CAD 11 million in 9MFY22 v/s a net loss of CAD 47.1 million in pcp. This is impressive and is expected to support the overall liquidity position.

• Bullish Macros: 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.

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 Presentation)

• 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:

Despite the ongoing tight economic situation, the company ended the quarter on a positive note and has managed to improve its revenue and cash flows, which is encouraging. The company has an impressive client base of over 50,000 legal firms, financial service institutions, and government organizations across Canada, Australia, the United Kingdom and Ireland and also looking for meaningful acquisition prospects in the coming days.

We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Celestica Inc, CGI Inc and Real Matters Inc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of DND at the last closing price of CAD 21.63 on May 26, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 26, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV 

  Technical Analysis Summary

Disclaimer

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