Friday, October 11, 2013

Data Group Debentures Trade At Massive Discount

Shares of Data Group (DGPIF.PK) have a dividend yield of nearly 20%. In this low-rate environment, Mr. Market is making it clear he does not believe in the sustainability of this dividend. While Data Group has proven itself to be a cash cow, because of the company's debt load, Mr. Market may be right.

But investors don't have to take the downside risk associated with the company's equity, because the company's debt (DGI.DB.A) is trading at a massive discount to par. Data Group's debentures trade at just 58 cents on the dollar (as of Tuesday's close), providing an upside of over 100% should the company make good on these obligations due in 2017.Read more...

17 comments:

Anonymous said...

Any thoughts following the latest quarter? Big EBITDA decline but divvy cut should mean enough cash flow to pay down some debt.

Saj Karsan said...

I do like the dividend cut, but they do have to find a way to get their costs in line with their revenues IMO

Anonymous said...

I agree although it takes time to adjust costs to revenues and the market has taken more of a shoot first approach on the debentures than I would have thought.

That being said, the review of the bank line might determine the short term outcome.

John L said...

Hey Saj,

As this article can no longer be accessed, would you please briefly summarize your investment thesis on the debentures for your loyal blog readers?

Thanks, really appreciated!

John

Saj Karsan said...

Hi John,

Sure:

- Customer stickiness, though industry in decline.
- Cutting costs
- Good cash flow, lower capex than amortization
- There is also bank debt ahead of these debentures
- There is also a pension shortfall
- Management has made debt reduction a stated priority

John L said...

Thanks a lot Saj!

But is the bank debt ahead of the debentures a positive? With current cash flow, i dont think the company can pay the bank debt due in 2015. So wat happens when the company fails to pay the debt, it just gets extended?

The company also needs to pay back 3 million on march and sep each year (sry, i couldnt figure out from the wording in the quarter report if it means paying 6 million in total per year? )

Do u still think after all these payments, the company is still able to pay back the 45 million debentures?

However, the recent insider buy on the debentures and common stock by the CEO and CFO may be considered as a positive.

I do apologize if the questions seem amature as I am very new in investing.

Thanks again!

Saj Karsan said...

Hi John,

Not amateur at all!

Correct, the bank debt is not a good thing.

I'm not as concerned with the company's ability to come up with the actual cash to repay the debt, though obviously that would be nice. What's more relevamt in my view is that they show themselves able to easily service interest on that kind of financing. That way, they can refinance comfortably and the debt should therefore trade back at normal levels.

Anonymous said...

Hi Saj,

I'm curious about your thoughts on the new 10+% investor KST Industrials. I thought the equity was an interesting choice for a new investor. It looks like this company owns a few other businesses so maybe a takeout is what they are looking at long term.

Saj Karsan said...

Hi Anon,

I don't really know what to make of it.

Anonymous said...

One thing that's interesting is that the CFO, Paul O`Shea, shows as a director or senior officer of a 10% security holder on Sedi and the only 10% holder that I can see is KST.

nsider Name: O'Shea, Paul Edward
Insider Relationship: 6 - Director or Senior Officer of 10% Security Holder, 5 - Senior Officer of Issuer

Anonymous said...

Any thoughts on the most recent quarter? I liked the sequential bounce back in margins and EBITDA.

Saj Karsan said...

Hi Anon,

I thought it was decent. Interest coverage on a cash flow basis is back to around 3X

Anonymous said...

Thanks Saj.

Although 2013 was a rough year for them, they still managed to pay dividends and pay down debt for a total above $11m. With the focus entirely on paying back debt now, things could be very interesting for the equity if they can stabilize revenues and margins. Definitely big IFs. I still think the debs are the best investment here but the equity definitely has some option value.

Anonymous said...

Any thoughts on the rights issue and new CEO?

New capital is always good for the debentures obviously but I'm curious if you have any other thoughts.

Saj Karsan said...

Hi Anon,

I liked the direction the company had been going in. The cost-cutting was making our investment a lot safer IMO, so I'm a bit worried about what the strategy of the new CEO will be.

Frank said...

Hi Saj,

What are thoughts of the recent events at DGI and the effect on debenture holders?

Thanks,

Frank

Saj Karsan said...

Hi Frank,

I answered your question in a post here: http://www.barelkarsan.com/2015/11/data-group-debentures.html

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