The Data Group (OTCPK:DGPIF), a Canadian provider of document management and printing solutions, appeared to be yet another victim of the Internet, with a long track-record of declining cash flows and climbing debt. However, the company has recently made a dramatic shift, and now appears well-positioned to grow and support its double-digit dividend yield.
Data Group has a long history in Canada, dating back to 1959. The company supplies a variety of printed forms and marketing materials, and has historically enjoyed a strong relationship with banks and large retailers. Many of its contracts with these customers are multi-year, which, coupled with minimal capex requirements, generated strong, stable cash flow for the company. This recurring cash flow prompted the company to go public as an income trust in 2004, capitalizing on demand for yield securities and taking advantage of a tax-efficient structure. In recent years however, the model fell apart, when the Canadian government effectively eliminated the tax-advantage for income trusts (prompting most, including Data Group, to convert to a corporation), and the shift away from print to online started to eat into revenues. As a result, the stock drifted lower, with an unsustainable dividend and eroding profits.
The First Step
Under new CEO Michael Suksi, who took over as CEO in October 2010, Data Group stepped up its efforts to modernize its product and service offerings, and to cut costs. The company has now expanded its services to clients, shifting into more online and faster growing segments. To further the product transition, Data Group acquired FSA Group in November 2011, bringing the company a variety of new service offerings including digitally printed direct mail, data analysis and social media marketing programs. A presentation (pdf) on the company's website provides good detail on the new services offered, as well as its customer list.
The transition has been slow to show up in cash flows, however, as investment in new technologies offset the impact of new contracts and cost reductions. Through Q3/12, quarterly EBITDA continued to track lower.
Hard Medicine - The Dividend Gets Cut
In November 2012 Data Group cut the dividend from C$0.65 to C$0.30 per annum. While the move was clearly warranted from recent financial trends, it was a hard hit for long-term shareholders, many I expect bought the stock as an income trust specifically due to its high dividend yield. The stock reaction since November was a harsh one, and, even at the new dividend level, the stock once again has a high double-digit dividend yield (14% as of March 6). Management set the new dividend level to achieve a target payout of free cash flow of 40-60%, with the cash saved from the dividend reduction to go to reduce debt.
Q4 Results - The Turnaround Takes Shape
On March 6, the company reported Q4 results, which showed dramatic improvement in EBITDA trends relative to the past few years. EBITDA was up 5.1% in Q4, which the company attributed to customer wins, new products gaining traction, and the ongoing impact of its cost reduction initiatives. The EBITDA growth, combined with a reiteration of the new dividend sparked a 21% rally in the stock. On the conference call, management provided further clarity on recent contract wins, and announced that it expects to accelerate its cost reduction relative to prior years. The commitment to debt reduction was also reiterated, and will be a key factor to watch as I believe debt is currently too high. It is a further comfort to know there is no debt maturing in 2013 and the company is well within its bank covenants.
I believe management is turning this company around. The expanded product line, growing EBITDA, combined with a sensible payout ratio, suggest this company will not be yet another print company falling victim to the Internet. With continued performance, I expect this will be reflected in the stock price. Based on management's guidance for dividend payout, the company expects to generate approximately C$0.60 in free cash flow per share this year, which suggests to me the stock could trade up to the C$6 level, based on a modest 10x free cash flow. This will likely take a few quarters of continued EBITDA growth, and perhaps further analyst coverage (only one analyst in Canada, TD Securities, follows the stock presently).
Note: The stock is far more liquid on the Canadian TSX, where it trades under the symbol DGI.