5i Research Blog
Dec 16, 2016 DH Corp: Yesterdays Blue-chip dividend stock, Todays ‘High-Flyer’?
What was not to like about DH Corp? The company had a cheap valuation on most metrics, paid a dividend in the 4% to 5% yield, has an international customer base of large financial institutions through long-term contracts and has largely been a great Canadian success story. Unfortunately, as value investors can often find out the hard way, cheap stocks are often cheap for a reason and can also get ‘cheaper’. Case in point is DH Corp; but what exactly happened here?
The news flow has been so steady with DH Corp that a timeline is really the best way to present the story.
October 25, 2016 – DH Corp releases third quarter results – The results were disappointing to say the least with big misses against estimates due to a cheque processing business slowing at a faster rate than expected and international clients delaying purchasing decisions due to concerns over issues such as Brexit and general cost conscious environment in the financial industry. Shares plummeted 43% primarily on concerns over the company being in breach of debt covenants and a dividend cut.
November 10, 2016 – DH Corp amends debt covenants with lenders giving the company a bit more breathing room on the debt to EBITDA covenant while also increasing the interest rate by 25 basis points (0.25%).
November 21, 2016 – DH Corp cuts dividend by 63% from $0.32 to $0.12. The reduction adds $85.5 million worth of additional cash flows. DH plans to spend 45% to 50% on share repurchases and 40% to 45% toward debt repayment.
December 7, 2016 – DH announces the formation of a special committee to address expressions of interest from third parties.
Overall the stock has taken investors on a bit of a ride. Some of the decisions made by the company recently are difficult but likely the appropriate course of action. With $1.9 billion in debt, the focus of the company is paying down debt and cutting the dividend should help with this endeavor. Investors will now be looking to the 2017 guidance provided by DH Corp, expected by year-end. With the end of the year often being an important time for contract signings, as institutions look to spend remaining IT budgets that are set to expire, markets will be looking for a sign as to whether the customers of DH will ramp up spending with the company again or if long-term growth expectations need to be adjusted. With the company currently ‘in play’ due to the news of the special committee, upside still remains. However, it is a much different stock than it was just over a month ago and those holding DH Corp as a stable dividend payer may no longer find this holding appropriate due to increased volatility. While the shares of DH did drop 43% on October 25th, the shares are now down only ~20% since the day the bad news began.
One last interesting observation worth noting through this series of events is the actions of analysts. Starting on October 27th, after the shares dropped over 40% in a single day, price targets and ratings began to drop. By our count, six of the nine analysts following the stock substantially cut price targets or downgraded the rating of the stock. Once DH cut the dividend, analysts began changing the recommendations back to more bullish outlooks, all within a few weeks. We think this is just another good example of not being overly reactive to news, as most investors that sold in the initial fear trade are unlikely to have enjoyed the bounce in the shares. Often, news gets priced in before an investor has a chance to react and doing nothing can be the best course of action.
You can read the full report here.
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