The company’s margin issue occurred a few years ago, as RCH’s EBITDA has contracted because the company was facing supply-side challenges due to the current inventory that was bought at higher prices, and the company believed they could resolve it within a few quarters, but it has been almost two years since, and the EBITDA does not show improvement yet. In addition, the renovation industry RCH operates in is currently in a tough spot in the cycle, given a weak consumer spending environment. The company just recently went through a one-time increase in price to offset tariff pressure. Overall, RCH has experienced some operational challenges in the last few years. RCH’s EBITDA margin has been quite weak, and the company is still highly dependent on the state of the trade war. Though there is some upside potential once the margin profiles improve and the uncertainty around tariffs subsides. To remain conservative, we are downgrading our rating by one notch to ‘B’.

Most segments are firing on all cylinders since the company has transitioned into a company with a diverse portfolio of businesses with a heavy emphasis on recurring revenue. X’s businesses possess a favourable competitive position due to the regulatory hurdle acting as a barrier to entry for the company. X is a high-quality dividend grower, the company’s management has demonstrated a disciplined capital allocation track record of shareholder-friendly policies by consistently raising dividends year after year, and implementing M&A in an opportunistic approach, while at the same time maintaining a moderately leveraged balance sheet. Although X’s valuation has expanded to premium multiples and is currently at the highest level compared to previous years. We think the premium valuation is justified given that the data business is growing faster and will quickly become a decent chunk of the overall business. With higher quality in the revenue stream and a stronger margin profile, we think X today deserves a higher multiple. We remain bullish on the long-term outlook for the business, given the momentum. We are upgrading our ratings by one notch to A-.

DSG is a software provider targeting logistics intensive customers. The recent uncertainty around trade has put some pressure on DSG’s customers’ near-term growth prospects. However, given the critical nature of the solutions, DSG’s management sees a limited negative effect on the company’s overall business. DSG’s business continues to experience a long-term tailwind due to the rise of e-commerce. DSG’s solutions have many attractive characteristics of a great business, including a high degree of recurring revenue, strong pricing power, low capital expenditure and high switching costs. The company has been quite consistent in its ability to execute an acquisitive growth playbook by targeting companies with similar economics. In fact, the company has demonstrated a track record of allocating capital by consistently growing sales and earnings by double digits over the years. A meaningful portion of DSG’s premium valuation was driven by the expectation that they can continue to execute this growth playbook in the foreseeable future, which we think is highly likely. We are maintaining our rating at “A-”.