On today’s TSX Breakouts report, there are 29 stocks on the positive breakouts list (stocks with positive price momentum), and 14 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a newly-listed growth stock that investors may want to put on their radar screens.
The stock began trading on the Toronto Stock Exchange on July 17. The company has impressive track record, delivering robust revenue growth and high margins.
The share price is up a remarkable 195 per cent from its initial public offering (IPO) price (IPO lock-up expires in Jan. 2021). However, the positive price momentum reversed its course earlier this month along with equity markets. The stock currently in correction territory, down over 20 per cent from its record closing high reached on Sept. 2.
On a valuation basis, the stock is not cheap. As such, this is a stock to watch - not chase. The current stock market volatility and weakness may present a future buying opportunity to long-term investors.
The company highlighted today is Dye & Durham Ltd. (DND-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Toronto-based Dye & Durham is a cloud-based provider of public records data serving over 25,000 clients - law firms (including Canada’s top 20 legal firms), banks and lenders, and government organizations. The client base is diversified with no individual customer representing more than 2 per cent of total revenue. The company has a high customer retention rate with a churn rate (customer loss rate) of approximately 2 per cent.
The company has three business segments: business law (representing roughly 50 per cent of total revenue), real estate (accounting for approximately one-third of total revenue) with the balance from litigation solutions. Revenue is largely generated from transactions.
In terms of geographic revenue breakdown, approximately 80 per cent is from Canada and roughly 20 per cent is from the U.K. and Ireland. Consequently, the company has exposure to the Pound Sterling and Euro.
Dye & Durham has a growth by acquisition business model aimed at driving EBITDA (earnings before interest, taxes, depreciation and amortization) growth.
Since the beginning of fiscal 2020 (the company’s year-end is June 30), management has completed five cloud-based acquisitions. Management has a disciplined acquisition strategy, purchasing businesses with transaction-based disbursement revenue and a diversified customer base. Synergies from acquired companies are expected to be captured within six months to one year. Currently, acquisition targets are focused in Canada and the U.K. However, management plans to extend its geographical reach down the road to Australia initially with a longer-term goal of expanding into the U.S.
Acquisitions will be funded largely through debt (low cost of debt) with management’s goal of maintaining a debt-to-EBITDA ratio of between 2 and 3 times.
Organic growth stems from cross-selling opportunities and price increases (price hikes are often passed on to customers as disbursement costs and represent a small portion of the overall transaction fee).
Investment thesis highlights
- Robust growth profile driven by acquisition growth (the most recent acquisition was completed earlier this month – Property Information Exchange Ltd., a U.K.-based cloud-based real estate data provider).
- High margin business. The adjusted EBITDA margin was 56 per cent in fiscal 2020.
- Proven track record (revenue compound annual growth rate of 71 per cent between fiscal 2016 and fiscal 2019).
- Management has “skin in the game.” The chief executive officer Matt Proud owns approximately 20 per cent of the shares outstanding through Plantro Ltd.
Before the market opened on Sept. 22, the company reported its fourth-quarter fiscal 2020 financial results.
Revenue was $14.2-million, above the consensus estimate of $13.5-million, but down 6 per cent year-over-year. The year-over-year decline in revenue resulted lower business activity due to COVID-19 and temporary closures of courthouses. Adjusted EBITDA was $8.8-million (adjusted EBITDA margin of 62 per cent), in-line with the Street’s forecast of $8.7-million. The share price was relatively unchanged that day, closing at $23.05, down 6 cents.
Management provided guidance for the first-quarter of fiscal 2021, expecting total revenue to come in at between $20-million and $21-million, and adjusted EBITDA to be between $12-milion and $12.5-million.
Chief executive officer Matt Proud said on the earnings call, “We believe that a work from home environment creates demand for our essential cloud-based services, which really act as digital infrastructure for the users, which helps keep the global economy running at all times. We believe our financial momentum, M&A [merger and acquisition] results, and now a fortified balance sheet puts us in a very strong position to continue building Dye & Durham in fiscal 2021 and beyond.”
The company will be paying its shareholders an annual dividend of 7.5 cents per share.
This small-cap tech stock with a market capitalization just below the $1-billion mark (currently at $981-million) is covered by three analysts who all initiated coverage on the stock in August - all with buy recommendations.
The firms providing analyst coverage on the company are: BMO Nesbitt Burns, Canaccord Genuity, and Scotia Capital.
The Street is forecasting revenue of $83.7-million in fiscal 2021, up 28 per cent from $65.5-million reported in fiscal 2020, and $97.3-million in fiscal 2022. The consensus EBITDA estimates are $46.8-million in fiscal 2021, up 28 per cent from $36.7-million reported in fiscal 2020, and $55.9-million in fiscal 2022. The consensus earnings per share estimates are 34 cents in fiscal 2021 and 57 cents in fiscal 2022.
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 25 times the fiscal 2021 consensus estimate.
The average one-year target price is currently $19, implying the stock is fully valued. Individual target prices are:
- BMO’s Thanos Moschopoulos and Canaccord Genuity’s Robert Young initiated coverage with an $18 target
- Scotia Capital’s Paul Steep set a $21 target.
It’s important to note that these three analysts launched coverage on Dye & Durham in early August when the share price was around the $15 level.
Insider transaction activities
There has not been any trading activity in the public market reported by insiders.
Technical analysis is limited given the stock’s brief trading history.
The stock has been a stellar performer since its debut on the Toronto Stock Exchange on July 17. The share price is up 195 per cent from its IPO price of $7.50.
However, the positive price momentum reversed its course on Sept. 3. Dye & Durham’s share price closed at a record high of $27.85 on Sept. 2. Since then the share price has entered correction territory, tumbling 21 per cent.
In terms of key resistance and support levels, the share price has an initial ceiling of resistance around $25. After that, there is resistance around $28, near its record closing high. Looking at the downside, there is initial technical support around $20, near its 50-day moving average (at $20.23). Failing that, there is technical support around $15.
This small-cap stock has reasonable liquidity. Since the stock began trading, the average daily average trading volume is approximately 386,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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