Dye & Durham (DND-T)

Under activists' pressure, the CEO has decided to step down, which was likely because the company decided it was going to lose anyway in the upcoming special shareholders' meeting. DND says it has received expressions of interest from ''inbound parties', at 'attractive premiums' but has paused its strategic review while it focuses on the special meeting and possible revamp of its board. Investors liked the news and the shares rose. But the future of the company is still very much in flux. The meeting is Dec 17 and if Engine Capital wins we could see a new board composition and a new direction for the company. It has potential, but a massive amount of debt. It is probably better off selling itself, in our view, due to its debt and small size, but right now it is hard to call. We would see it as a HOLD until the meeting is resolved and some clarity comes out. 
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Software is very widely used in the legal industry. In the last quarter ending June 30, reported loss of $105M. But last year the CEO made $98M, the second-highest-paid CEO in Canada. Stays away because it's not making $$.

Avoid. Lots of issues -- governance, infighting, balance sheet. Lots of volatility.

We think DND is still a HOLD for a few reasons:

DND possesses a portfolio of high-quality businesses with decent pricing power (gross margin around 87%).
In recent quarters, management is also committed to doing share repurchases at an aggressive pace, cancelling more than 20% of total shares outstanding within one year. 
Also, cost control initiatives and a recovery in the real estate market as interest rates peak could be a near-term catalyst for the share price to gain momentum.
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We think DND is quite cheap given the quality of the portfolio of legal software businesses they possess strong competitive advantage positions (few competitors). The company is also actively repurchasing shares recently at an aggressive pace, and management also believes shares are significantly undervalued. However, the leverage is high.

The recent lawsuit is relatively minor, we think it is just normal business issues. On the other hand, the business model is quite controversial as DND will acquire niche legal software companies that possess strong pricing power (only one or a few providers) through a leveraged balance sheet, and raise prices to create shareholder value (the practice similar to Valeant in the past or TDG). DND did raise prices quite aggressively but we don’t think DND gouges its customers like Valeant in the past.
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DND is a highly volatile name, trading either up or down a lot on occasion without any significant news (none of note yesterday). Fundamentally, the company is trading at 7.1x Forward P/E. Management is aggressive in repurchasing shares, they cancelled 20% of the share outstanding within the last year. Management is implementing cost-cutting initiatives and DND expects revenue to recover when the real estate market comes back. Having said that, the leverage level is quite high, with the net debt/ EBITDA currently around 8.9x, and growth was mainly through acquisitions, which investors need to monitor as potential risks. Overall, the company is trading at the lower end of historical averages since going public. We would be comfortable adding at this valuation, but being cognizant of leverage and small cap risk. 
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Doesn't have the proven business model he's looking for.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Management-led buyout proposal. Proposal at 7x IPO price last year. Revenue grew an impressive 300% YoY. High ROI leading to strong shareholder value. Unlock Premium - Try 5i Free

Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. Market sentiment continues to be weak. There has been a trend of many high growth names guiding for lower growth resulting in a massive drop in shares. At 6.8x earnings, it is very cheap. The risks are more than priced in at this point. Would be very comfortable at these levels with a 5 year+ time horizon. Unlock Premium - Try 5i Free

Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. Management is confident they can meet targets, including higher prices. There is little concern for negative media attention. Shares are down after a large sell-off in tech in general. The risks are most likely priced in already. Unlock Premium - Try 5i Free