Silver Linings - Dye & Durham Ltd.

Q3 2020 was a monster quarter for IPO’s. In the newest Silver Linings, we discuss one IPO we participated in and how it may benefit from the on-going pandemic.

Debt. We keep talking about it. In previous commentaries, we have pointed out the surge of debt issuance following government actions to stabilize the bond market as a response to COVID-19.  But debt issuance isn’t the only method companies are choosing to finance scaling their operations. In Q3 2020, the U.S. initial public offering (IPO) market wasn’t too far behind with 165 IPO’s totaling $61 billion, the most capital raised through IPO’s in a single quarter for the last 10 years. 

We look selectively through these IPO’s for new companies that hit our checklist in terms of long-term growth opportunities: profitability, free cash flow, leverage, and valuation.  One example of a recent IPO that we participated in was Dye & Durham (TSE: DND), a Toronto-based company that provides cloud-based legal software and technical solutions to a blue-chip customer base that includes law firms, financial institutions, and government organizations. DND’s platform aims to increase productivity and efficiency through a wide range of services, which are more critical than ever in COVID-19’s work-from-home environment.

$DND Price History
Source: Bloomberg

The software aggregates public records into an easy-to-use format allowing its customers to validate and process transactions faster and more accurately.  This provides considerable value for its clients, allowing DND to earn >50% EBITDA margins and deeply embeds its product within customers workflows, creating a loyal customer base.  As a result, the company benefits from high customer retention with 109% net revenue retention, high net promoter scores, and an average customer tenure of 16 years among its top 100 customers. 

The business is also unique in that the majority of the fees incurred by its customers are passed on to the end customers as a flow-through disbursement, which represent only a small fraction of the total invoice price.  In our view, this results in increased pricing power across its product set.  Management is also well-aligned with shareholders, with insiders owning over 30% of the float, including CEO Matt Proud, who owns ~18% of outstanding shares. 

Going forward, we believe that analysts will continue to have an upward bias to their consensus estimates.  Since its IPO in July this past summer, DND has had its 2021 consensus EBITDA estimates increase by 21%, while its shares outstanding increased by only 5%.  This was due to the company completing a $50 million acquisition in the UK, improving its organic growth rate, and refinancing its debt at a lower rate, smart move given the current historic low rates, with no central bank planning on raising any time soon.   The company has low leverage at 0.8x D/CF and generates significant free cash flow.  This should allow it to continue to execute on its growth strategy both organically and inorganically, by consummating additional acquisitions from its pipeline of over 35 complementary targets.