Despite lower earnings, fintech stock D+H is a buy

DH Corporation (D+H) is a leading financial technology provider to financial institutions worldwide. It provides global transaction banking, lending, payments and integrated core solutions. The company’s earnings should be hurt by lower LaserPro renewals in 2016, but renewal rates are expected to return to more normal levels in 2017. The stock yields 3.8 per cent and is a buy for long-term growth and income.

DH Corporation (TSX─DH) has run into some more turbulence. The shares suffered a setback last fall when a U.S. hedge fund firm published a report that questioned the company’s accounting and growth prospects. Though the fintech stock recovered this year, it suffered another setback in April when the company’s first-quarter results failed to live up to expectations. Adjusted earnings per share (EPS) of $0.43 were well below the consensus forecast of $0.57. The miss was mainly due to lower earnings at the U.S. lending business, where existing LaserPro contracts had a lower number of renewals in 2016 relative to 2015. LaserPro is a system that helps banks with their lending and compliance.

DH Corporation is a leading financial technology provider to financial institutions worldwide. The company’s global transaction banking, lending, payments and integrated core solutions are used by nearly 8,000 banks, specialty lenders, community banks, credit unions, governments and corporations. Its business is divided into three segments: global transaction banking solutions (GTBS), lending and integrated core (L&IC) solutions, and Canada.

For the three months ended March 31, 2016, D+H made $45.4 million (adjusted), or $0.43 a share, compared with $47.4 million, or $0.55 a share, in the same period of 2015. The decline reflected operating segments results, increased financing costs and a higher number of shares outstanding.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 1.0 per cent to $39.4 million at the Canada segment. EBITDA (adjusted) at the GTBS segment was $22.1 million. This segment is the former Fundtech, which was acquired on April 30 of last year. At the L&IC segment, EBITDA declined 13.5 per cent to $41.1 million, due largely to the lower LaserPro renewals.

The main reason for the LaserPro upset has to do with timing. Since LaserPro contracts range in terms from three to seven years, and sometimes longer, their maturities are not evenly distributed from year to year. When these contracts do mature, however, they are renewed at a high rate. And this remained the case in the first quarter.

But only about 10 per cent of LaserPro contracts will mature this year. Consequently, D+H expects reduced EBITDA growth at the L&IC segment in 2016. In 2017, however, the company expects renewal rates to return to more normal levels.

D+H’s adjusted EPS in 2015 was $2.56. This figure is likely to fall to $2.20 in 2016, due to the LaserPro renewal issues. But the stock trades at a reasonable 15.3 times that estimate. What’s more, this multiple is well below those of the company’s U.S. peers.

DH Corporation remains a buy for growth and income.

 

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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