It is often said that the best predictor of future behaviour is past behaviour. If we apply this philosophy to the corporate world, DH Corp. has delivered solid operational and stock performance, and the strong performance is likely to continue. This is a stock in
The company
Toronto-based DH is a financial-technology provider. The company's software and technology provides lending, payments, enterprise and global transaction banking services to nearly 8,000 financial institutions.
Proven past performance: DH has a solid track record of high single-digit top-line growth and in 2014, revenue broke through the $1-billion mark as management continues to successful execute and achieve its growth objectives.
In the second quarter, the company's Canadian segment reported solid operational results with 5-per-cent year-over-year growth. The U.S. lending and integrated core (L&IC) segment reported a solid backlog in the integrated core part of that segment. Lastly, the global transaction banking solutions segment reported a backlog at record levels, a positive for future growth.
Rising demand outlook: In a February report by Celent, a research and consulting firm, information technology (IT) spending by North American banks was anticipated to grow by 4 per cent in 2016. Management sees growing demand for its products given increasing regulatory requirements, technology upgrades and replacements, and simply the push to remain competitive. Management's longer-term objectives are to achieve adjusted revenue growth between 5 per cent to 7 per cent, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins of 30 per cent, and adjusted net-income per-share growth between 8 per cent to 10 per cent.
Acquisition synergies: Management anticipates the recent Fundtech acquisition will be accretive within the first 12 months with synergies from cross-selling opportunities and cost savings.
Global expansion: In the second quarter, the Canadian business represented 47 per cent of total adjusted revenues, the U.S. L&IC segment represented 38 per cent and the global transaction banking solutions segment represented 15 per cent. The strong U.S. dollar is positive for DH, which reports in Canadian dollars. The acquisition of Fundtech provides existing clients with global capabilities and creates an international growth platform for the company.
Balance sheet: The company's net debt/EBITDA ratio is high at 3.39 at the end of the second quarter. Management targets reducing its leverage ratio to 2.5 times in 2016.
Recurring revenues: Over 80 per cent of the company's revenues are recurring, an indication of revenue stability.
Dividend yield: The company pays shareholders a quarterly dividend of 32 cents a share, equating to an annualized yield of 3.3 per cent.
Valuation
The stock is trading at a 12-month forward enterprise-value-to-EBITDA multiple of 12.3 times, based on the consensus estimates. This is a premium to its one-year average of 11.6 times. On a 12-month forward price-to-earnings basis, the stock is trading at a multiple of 15.7 times the consensus earnings estimate, in line with its one-year historical average.
Chart watch
Year-to-date, the stock price has increased 7 per cent, outperforming both the S&P/TSX composite index and the IT sector.
Since 2012, the stock has been in a positive uptrend and has been outperforming the index by a wide margin. For instance, in 2014, the stock price appreciated 23 per cent, while the price return for the S&P/TSX composite was 7 per cent. In 2013, the stock price rose 38 per cent, while the index increased 10 per cent and in 2012, the stock price jumped 28 per cent, while the S&P/TSX rallied just 4 per cent.
For most of 2015, the shares have been consolidating, predominantly in the $38 to $42 range. Currently, the shares are trading at the lower end of this band. There is technical upside resistance at $40, which is near its 200-day moving average, and then just above $41, near its 50-day moving average.
The relative strength index is at 38, suggesting that the shares are nearing an oversold condition.
Analysts' recommendations
There are eight analysts whom cover this stock. Six analysts have buy recommendations, one analyst has a hold recommendation and one analyst has a sell recommendation. One-year price targets range from $44 to $51, with the average one-year price target of $48.14, implying a potential one-year price return of more than 20 per cent.
The consensus revenue estimate is $1.5-billion for 2015 and $1.7-billion for 2016. The consensus earnings per share estimate is $2.35 for 2015, growing 10 per cent to $2.59 in 2016.
The bottom line
The stock has solid growth potential combined with an attractive dividend yield. DH is trading at a reasonable valuation and I recommend accumulating shares of DH at current levels.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com