Rating

Perspectec

BUY 24-Month

Dye & Durham

Price Target

Executive Summary:

$24 An OpenText Story Dying for More Acquisitions

August 7, 2020 Price: (DND-Toronto) C$15.25

Robin Manson-Hing

Dye & Durham acquires online gateways to public records data and charges primarily on users on a per-use basis

This IPO is defined by

505 pages of details

Source: Company Reports

Background of IPO

Dye & Durham originally attempted an October 2018 IPO, but issues arose when $75 million of the $125 million in selling shares were to go to existing selling shareholders.

Dye & Durham released its Preliminary Prospectus on June 29, 2020. DND.TO began trading on the TSX on July 17, 2020 at $7.50 before closing the 1 day at $14.80.

The market may not have efficiently digested 500+ pages in 13 business days for a $150 million stock issuance. We have briefly combed over the document and there appears to be no major financial hiccups.

Use of Proceeds are going to pay off debt and the lockup period is 180 days, which is fine for now but acquisitions in the future should be made.

Dye & Durham’s Estimated Revenue Splits Show the Heavy Reliance on Acquisitions.

Source: Perspectec and Company Reports

The Good News is that near-term Organic Growth is taking

place driven by price increases

Source: Perspectec and Company Reports

Strategy Involves Constant Layoffs for Margins

“The Company is managed on the belief that by providing leading edge proprietary technology coupled with exceptional client service, it can make what are often time consuming legal processes, mainly dealt with by support staff in law firms or administrative staff in large financial service institutions, easier to manage and more efficient.

Dye & Durham’s vision is to be the world’s leading provider of public records registry data and the workflows this information powers.”

Cost Cutting has become more Aggressive in the Face of COVID-19

Source: Company Reports

Restructuring has resulted in some negative reviews for some customers seeking support…

Acquired March 2019

Source: Google

…while employee reviews paint an overworked

staff, the feedback is similar (probably worse)

to that of employees at OpenText and

Constellation Software

This is usually a good sign for investors in the short- to-medium term

60% Adjusted EBITDA Margins do not account for

capitalized software and lease costs.

In addition, constant restructuring and acquisition costs appear to be part of their business model and will likely be ‘reoccurring’

Source: Perspectec and Company Reports

Despite these issues, disclosed user metrics appear strong… however these stats are not comparable to other companies…

…as the metrics only apply to a portion of customers

It’s not clear what percentage of customers have revenue generated >$5,000. Not a true churn rate.

It’s not clear what percentage of customers have revenue generated >$5,000. Not a true net revenue retention.

A Net Promotor Score of 58 in the face of rising prices does not reconcile with a 2% churn rate. However having inelastic pricing on existing products demonstrates a reasonably good NPS.

Product upgrades and

integrations are excluded

from the income

statement

Source: Company Reports

Lower Reoccurring Acquisition and Restructuring Costs we believe should be built into a forecast continuously (similar to OpenText)

Source: Perspectec and Company Reports

Adjusted EBITDA also excludes cash expenses from lease contracts as per IFRS 16

Source: Perspectec and Company Reports

It is also fair game to deduct lease payments and the associated interest from Adjusted EBITDA.

Source: Perspectec and Company Reports

Dye & Durham also appears to be pro-rating cost synergies, which is an aggressive method we have not seen before.

Source: Perspectec and Company Reports

A Legitimate Adjusted EBITDA still reports impressive margins, and this should continue in fiscal 2020 and 2021.

Adjusted EBITDA metrics are similar to how OpenText and Others Report

25% Annual EBITDA Growth and Inelastic Pricing are a Good Sign to a Long Growth Runway.

OpenText EBITDA Growth Through Acquisitions.

Dye & Durham EBITDA Growth.

Source: Perspectec and Company Reports

OpenText $1,132 $19,500 17.2x Dye & Durham $42 $502 12.0x

Source: Perspectec and Company Reports

Dye & Durham is trading at a discount to OpenText, which is fair

given OTEX’s lower cost of capital and lower Free Cash Flow Yield (~2% vs. ~4%)

DND.TO is generating around $10 million/year in Free Cash Flow and its Operations are not Dilutive.

Free cash flow can be used to pay off debt and maintain their net debt / EBITDA covenants.

There are many businesses available to be acquired. Examples below include competitors that may be acquired in the future

There are many businesses available to be acquired. Examples below include competitors that may be acquired in the future

Source: Perspectec and Company Reports

Acquisitions via share issuances will likely be accretive to Adjusted EBITDA at the current $15 price.

@ $15 per share, DND.TO can grow EBITDA by 15% by diluting Shareholders 9%.

For SDG, DND.TO paid 1.9x EV/EBITDA post synergies.

If DND.TO can acquire platforms at 5x EV/EBITDA, DND.TO would need to raise ~$60 million in equity to grow EBITDA an additional 15%.

Assuming Ad. EBITDA of $77.5 million, growing EBITDA by $11.6 million through acquisitions requires $58 million raised through equity.

At $15/share about 4 million shares would need to be issued (vs. 44.3 million shares outstanding).

Fiscal 2022 EBITDA of $89 million, applying the current 12x EV/EBITDA multiple = $1.07 billion market capitalization.

Source: Perspectec

$24 target price by fiscal (June) 2022

CEO Matthew Proud, former exit CEO of OneMove through investing in the company (OneMove is now a business within Dye & Durham)

Former CFO of OneMove Ronnie Wahi

Tyler Proud, brother of Matthew and former director of Dye & Durham now running another software company

Largest Shareholders own just under 40%

We believe investors should buy Dye & Durham after the announcement of a major acquisition. We expect this to happen over the next 18 months.

Recommendation and Price Target

Our price target of $24 per share by June of 2022 is based on an EV/EBITDA multiple of 12x DND.TO’s fiscal 2022 adjusted EBITDA of $89 million.

Biggest Risks to Target Price

No acquisitions are made over the next 18 months and/or the EV/post-synergy EBITDA is materially higher than 5x.

The equity markets do not collapse.

Net promotor scores for the acquired platforms are around the industry average.

Majority Shareholders

Rating: BUY