Dye & Durham Limited

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 Highlights:

• Recently, the company closed its previously announced offering of 2,381,621 common shares of the Company on a bought deal private placement basis, at a price of CAD 21 per share for gross proceeds of CAD 50.014 million.
• On September 28, the company entered into a new credit agreement of a CAD 140.0 million revolving term loan facility, with an additional uncommitted accordion of up to CAD 25.0 million, for an aggregate total availability of up to CAD 165.0 million.
• Recently, the company announced that it has entered into an agreement to acquire Property Information Exchange Ltd. for ~£31.0 million or ~CAD 52.9 million. Furthermore, the company entered into an agreement with Canaccord Genuity Corp. wherein the group would issue 2,381,621 common shares via a bought deal private placement basis, at a price of CAD 21 per Share.

FY20 Financial Highlights: DND announced its full-year results, wherein the company reported revenue of CAD 65.510 million, improved significantly from CAD 43.845 million in FY19. The increase was driven by significant growth from the Canada region. Operating profit stood at CAD 34.521 million, as compared to CAD 26.193 million in the previous financial year. The company reported higher technology and operations costs and direct costs and higher and administrative expense. The company reported a net loss of CAD 11.237 million, as compared to CAD 0.710 million in pcp, due to higher finance costs and amortization and depreciation costs and higher acquisition, restructuring and other costs.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company derives a portion of its revenue through real estate conveyancing product line and is subject to witness seasonality. Furthermore, a major chunk of the revenue is derived from the cloud segment, and due to the limited barrier, the cloud segment might turn into a perfect competition market and would lead to pricing pressure which would eventually dampen the top-line.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of DND appreciated ~59% so far this year. Dye & Durham offers of cloud-based software and technology solutions which are designed to improve the efficiency and productivity for legal and business professionals. The group provides complex data services and workflow, which are extremely useful for information and regulatory requirements. The recent acquisition of Property Information Exchange Ltd. would increase the company’s footprints and augurs well for improved business prospects. The company has a strong clientele of 25,000 legal firms, financial service institutions, and government organizations, which suggests strong revenue visibility. The services of the company are focused on increased productivity of the firms and provide benefits to the professional practitioners and financial service institutions. The company has a presence in the real estate segments too; wherein the group provides solutions to simplify and expedite the process of buying, selling, and financing real estate and connects with participants and offers a secure and efficient means of completing transactions online. With expected improvement in the real estate demand, we expect improved prospects for the above segment too. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have considered Kinaxis Inc, Descartes Systems Group Inc and Real Matters Inc etc., as a peer group. The group is operating in the highly growth-oriented industry, and the business prospects look attractive; however, there is limited history available as the group is recently listed on the stock exchange. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ on the stock at the current closing price of CAD 23.49 on October 14, 2020.

DND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Computer Modelling Group Ltd.

Computer Modelling Group Ltd. (TSX: CMG) is a computer software technology and consulting company serving the oil and gas industry. The company is a developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, London, Dubai, Bogota, and Kuala Lumpur. 

Recently, the company confirmed the announcement of the appointment of Kelly Tomyn for the post of Interim Vice President, Finance and Chief Financial Officer of the Company.

Q1FY21 Financial Highlights: CMG announced its quarterly results, wherein the company posted revenue of CAD 16.672 million, as compared to CAD 18.123 million in the previous corresponding period (pcp). The decline in the revenue was primarily due to lower annuity/maintenance licenses fees and inclusion of income from Perpetual licenses in pcp. The decline in the annuity/maintenance licenses fees was due to the impacts of the COVID-19 pandemic, as organizations have altered their CAPEX plans. Professional services stood higher at CAD 2.149 million, as compared to CAD 1.208 million in Q1FY20. Operating profit slumped to CAD 5.711 million from CAD 7.068 million in pcp. Operating profit margin declined to 34%, as compared to 39% in the previous corresponding period. EBITDA stood at CAD 6.767 million, as compared to CAD 8.118 million in pcp. The company reported net income of CAD 3.262 million, against CAD 4.442 million in pcp. Free cash flow stood lower at CAD 4.239 million, as compared to CAD 5.707 million in Q1FY20.

Q1FY21 Financial Highlights (Source: Company Reports)

Key Risks: Due to high dependency on oil and gas clients, adverse effect on crude oil demand can hit revenues of the company. Lower demand for crude oil would result in lower drilling activity by the oil manufacturers resulting in lower budget allocation for the software and maintenance purposes.

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  The stock of CMG corrected ~36% so far this year due to weak industrial outlook in the recent past. The group decent margin profile, and maintained a consistency over the last five years, with EBITDA margin above 40%, operating margin above 35% over the past five years and Net margin above 25% over the past five years. The group has delivered ROE above 35% over the past five years. Further, LTM ROCE of 36.5% is significantly higher than the Weighted Average Cost of Capital (WACC) of 9.5%. The company is focused on ensuring the resilience of its business by adjusting its cost structure. It has taken various cost reduction measures and is protecting liquidity and seems to be well-positioned to deal with these uncertain times. The group has delivered a decent result and took prudent measures to manage cost amid the challenging time. However, the group is serving the oil & gas industry, which is going through a pain owing to lower demand in the past few months. Though the demand recovery is coming, it is still not close to the pre-pandemic level. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Software & IT Services) median on NTM basis. Hence, considering the aforesaid facts and current price movement, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.28 on October 14, 2020.

CMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.