DCI - DirectCash Payments Inc

[kab60]

I know a bunch of guys here like big dividend payers so thought I'd do a quick one of a Company that I've followed since I came across a small writeup by Canadian investor Jason Donville.

 

I think DCI - Directcash Payments - is about as simple as it gets. The company is "rolling up" ATM's in Countries like USA, Canada, UK and Australia, where cash probably is somewhat in secular decline. It's yielding 12 percent at the moment even though it only pays out about half of it's distributeable cashflow.

 

Profitability is negative due to the high levels of depreciation and amortization on the acquired ATM's, but the cashflows are going strong. It's somewhat like Redbox but I think cash will last longer than DVD's, and instead of buying back shares it's paying out a lot of cash.

 

Marketcap is around 200m CND, net debt abound the same so EV around 400m CND vs Q1-Q315 EBITDA of 52m. That's about 70m annualized or a multiple of 5,7 which I think is pretty low since it has been growing very nicely despite the big yield and maintenance capex is low.

 

Obviously people are worried that Visa, Mastercard and payments by smartphones will render cash useless, so it requires some faith in cash sticking around and the use for it not declining too rapidly (especially in Australia where payments by smartphone apparently is starting to become common).

 

DCI's bank loans has a blended cost around 5-5,5 percent, so clearly the Company ought to buy back stock instead of paying out 12 percent of it's marketcap in dividends, but according to this article (which is a much more thorough writeup: http://seekingalpha.com/article/3765946-directcash-payments-is-a-cash-flow-monster-on-sale) it's restricted by 125m of unsecured notes that are callable mid 2016. The notes pay 8,25 percent so it might make for DCI to refinance and optimize the capital structure if the stock keeps trading at these levels.

 

I like it but like other stuff as well and have little liquidity. No position.

[Guest notorious546]

Insiders own ~17% as well. consistent free cash flow from what i've seen.

 

My concerns about the company are the leverage and relatively lower returns on equity and invested capital. And i agree the acquisitions are hammering down in net income etc. Makes me wonder what do you think the real ROE's and ROIC's are?

 

Thanks. I think its interesting at today's levels too.

[Guest notorious546]

Insiders own ~17% as well. consistent free cash flow from what i've seen.

 

My concerns about the company are the leverage and relatively lower returns on equity and invested capital. And i agree the acquisitions are hammering down in net income etc. Makes me wonder what do you think the real ROE's and ROIC's are?

 

Thanks. I think its interesting at today's levels too.

 

and i guess i'm not really sure what maintenance capital looks like vs what they've been spending? seems too hard for me to decipher

[Nelson]

Insiders own ~17% as well. consistent free cash flow from what i've seen.

 

My concerns about the company are the leverage and relatively lower returns on equity and invested capital. And i agree the acquisitions are hammering down in net income etc. Makes me wonder what do you think the real ROE's and ROIC's are?

 

Thanks. I think its interesting at today's levels too.

 

Insiders have been aggressively buying at current levels too. I think there was something like $1MM in insider buys in November and December alone.

 

I have a small position, enticed by the monster FCF yield. I want to see them make more progress on their debt before buying more. Even if they refinance those unsecured notes and just save a couple of percent annually in interest, I think it'll help. They're also applying for their Canadian bank license. Not sure how long that will take, but it should help them save in interest costs going forward.

[SnarkyPuppy]

Silly question but where can I see the official filings for insider purchases?

 

I can find press releases on news sites but cannot locate on Sedar.

[DTEJD1997]

Hey all:

 

As time goes by, I am moving MORE towards cash...

 

I have a single credit card that I use for some things & online transaction & sometimes when traveling.

 

The vast majority of time, I use cash.

 

A lot of what I buy is cash only.

[JayGatsby]

Thanks. Seems pretty interesting. Is there any reason it's traded down other than currency and some general economic weakness? It looked like there had been some weakness in Australian transactions but not a sustained trend.

 

Anyone know the tax implication as an American of a Canadian dividend? It looks like there is a 15% withholding tax but then this is a deduction against US taxes? 

[siddharth18]

I'm trying to learn more about this company as well.

 

Here are some links that explain the usage/trends for cash:

 

http://www.frbsf.org/cash/files/FedNotes_Evidence_from_DCPC.pdf

http://www.frbsf.org/cash/cash-how-we-use-it/how-we-use-cash/trends-cash-usage

 

According to various sources, an ATM machine costs between US$2000-US$5000. Assuming each one costs US$5000 it'd be a total of CAD 155M ($5000 x $1.41 USD/CAD x 22000 ATMs). At the current EV of CAD 400M, you're paying CAD 245M simply for the placements/contracts/agreements and the network. So I suppose the important question here is about the sustainability of the margins.

 

 

 

 

Anyone know the tax implication as an American of a Canadian dividend? It looks like there is a 15% withholding tax but then this is a deduction against US taxes? 

 

That's correct. CA deducts 15% before it hits your account but US allows a dividend tax credit to be filed at tax time so as to avoid double taxation. Dividends over $300 will require Form 1116. Details here https://www.irs.gov/taxtopics/tc856.html (I'm not a CPA/lawyer, always double-check what anyone says).

 

 

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Here are some resources I found that gives more info about the ATM business, including ATM routes for sale:

 

 

http://www.vendingroutesforsale.net/atm-route-for-sale-phoenix-arizona.html

http://www.vendingroutesforsale.net/atm-route-fort-myers-florida.html

http://www.vendingroutesforsale.net/atm-route-dallas-texas.html

http://www.vendingroutesforsale.net/atm-route-tampa-florida.html

http://www.vendingroutesforsale.net/atm-route-minnesota.html

http://www.vendingroutesforsale.net/atm-route-tarpon-spring-florida.html

http://www.vendingroutesforsale.net/atm-route-new-york-city.html

 

^^ Those businesses sell for around 25% cash flow yield but you gotta subtract maintenance capex, cost of labor, cost of capital.

 

http://atmbrokerage.com/faq/

[SnarkyPuppy]

New to investing outside of the US - is general consensus that it is smart to hedge against currency risk here?

[FFHWatcher]

Silly question but where can I see the official filings for insider purchases?

 

I can find press releases on news sites but cannot locate on Sedar.

 

Sedi.ca

 

The site kinda sucks but you will get the hang of it in 4-5 years (I have been using it for years and I still don't input the right info the first time).

[farbelow]

Silly question but where can I see the official filings for insider purchases?

 

I can find press releases on news sites but cannot locate on Sedar.

 

Sedi.ca

 

The site kinda sucks but you will get the hang of it in 4-5 years (I have been using it for years and I still don't input the right info the first time).

 

I use https://www.canadianinsider.com . Site seems OK, and I got the hang of it in a couple of minutes  8)

[kab60]

Thanks. Seems pretty interesting. Is there any reason it's traded down other than currency and some general economic weakness? It looked like there had been some weakness in Australian transactions but not a sustained trend

I'm not sure but there is some worry about the number of transactions in Australia where people are starting to pay via their smartphone.

[kab60]

Insiders own ~17% as well. consistent free cash flow from what i've seen.

 

My concerns about the company are the leverage and relatively lower returns on equity and invested capital. And i agree the acquisitions are hammering down in net income etc. Makes me wonder what do you think the real ROE's and ROIC's are?

 

Thanks. I think its interesting at today's levels too.

 

and i guess i'm not really sure what maintenance capital looks like vs what they've been spending? seems too hard for me to decipher

Well, if you accept the argument that GAAP earnings aren't the real deal in this case due to amortization of intangibles a rough way to look at the return might be figuring out owner earnings and compare that to assets employed. So Q3 they had 304m non current assets versus 70m FY2015E EBITDA of 70m. Then you might want to adjust EBITDA to get to owners earnings. Maintenance costs are real (though I believe them to be minor), and you'd probably want to add a bit of acquisitions to keep earnings steady (ie they might need to make up for declining transaction by buying more ATM's). Basically I think EV/EBITDA is a decent way to value this but would like it to get cheaper. Debt is a big part of the capital structure so obviously one needs to get comfortable with that but net debt has been trending down and was down 5 percent y/o/y last quarter.

[kab60]

I started a position last week. Here's a piece om cash demand (I didn't check the source): http://www.ncr.com/company/blogs/financial/mobile-payments-wont-impact-cash-demand

It's not central to my thesis but perhaps mobile payments are a bigger threat to credit cards than cash.

Someone asked about maintenance capex - according to management it is around 1m/quarter. They subtract maintenance capex from distributable cash which is around 45m/year or around 25 pct cash yield at current prices. They pay out a bit more than half of that and use the rest for growth and debt reductions.

[kab60]

Q4 highlights:

Growth in transaction volumes in all business segments for the three months and year ended December 31, 2015 compared to the prior year periods

Increase in ATM transactions of 7%

Increase in Other Services Transactions of 4% and 3% respectively

Increase in the number of active ATMs as at December 31, 2015 by 2% to 21,454 as compared to the prior year

[kab60]

It seems like I'm the only one who's excited about a 20 pct. cash yield and 12 pct. dividend (it's my biggest position), but they just delivered pretty strong FY15 results with funds from operations going up 3m to 46,5m.

 

http://www.marketwired.com/press-release/directcash-payments-inc-announces-results-operations-three-months-year-ended-december-tsx-dci-2108329.htm

[Guest notorious546]

do you think they will ever be able to reduce the debt load or generate higher revenues/share? seems like some consistent headwinds here.

 

 

[kab60]

Well, they have increased funds per share (funds from operations per share went to 2.66 from 2.48 y/o/y) - helped by debt - so I'm not too worried, but leverage works both ways, so if cash earnings come down a lot, it's a different story. They could sacrifice growth and the dividend if needed, but they seem comfortable, and with so much of managements skin in the game I trust them to do the right thing. Net debt is 210m versus 45m free cash after interest and maintenance capex, so it doesn't seem crazy considering it's not a cyclical business.

[Guest notorious546]

pretty crazy to see a dividend yield that high, when the payout is so low and has been maintained. 3.0x debt doesn't seem

[Guest notorious546]

Didn't look like a great quarter to me. Higher Debt, Lower EBITDA and Cash flow yet transactions are up and so are other services. Minor acquisitions as well but still don't see how the company will deleverage. Payout ratio has also increased y/y but the yield is still quite attractive at 12%.

 

I haven't listened to the conference call but would be interested in hearing anyone elses thoughts on the company.

Book1.pdf

[kab60]

I still haven't had a chance to listen to the CC, but I agree results doesn't look good. I don't like they increased net debt in the quarter, because leverage is already a bit high. If their small tuck in acquisitions isn't enough to offset reduced income it could get bad, but it's hard to judge them on one quarter. What I'm speculating is obviously a dividend cut. While I wouldn't mind one, I suppose others would, which would probably put downward pressure on the stock (unless it's already reflected). Hrmmm. I'm undecided. I think it's cheap (and it's a big position for me) but the leverage might get uncomfortable for me if FFO declines.

[Guest notorious546]

I still haven't had a chance to listen to the CC, but I agree results doesn't look good. I don't like they increased net debt in the quarter, because leverage is already a bit high. If their small tuck in acquisitions isn't enough to offset reduced income it could get bad, but it's hard to judge them on one quarter. What I'm speculating is obviously a dividend cut. While I wouldn't mind one, I suppose others would, which would probably put downward pressure on the stock (unless it's already reflected). Hrmmm. I'm undecided. I think it's cheap (and it's a big position for me) but the leverage might get uncomfortable for me if FFO declines.

 

doesn't really seem like a clear short either. the cost on to borrow would be quite high i imagine?

[kab60]

I still haven't had a chance to listen to the CC, but I agree results doesn't look good. I don't like they increased net debt in the quarter, because leverage is already a bit high. If their small tuck in acquisitions isn't enough to offset reduced income it could get bad, but it's hard to judge them on one quarter. What I'm speculating is obviously a dividend cut. While I wouldn't mind one, I suppose others would, which would probably put downward pressure on the stock (unless it's already reflected). Hrmmm. I'm undecided. I think it's cheap (and it's a big position for me) but the leverage might get uncomfortable for me if FFO declines.

 

doesn't really seem like a clear short either. the cost on to borrow would be quite high i imagine?

The CEO owns plus 10 percent of the stock, which is why I could get comfortable with the leverage in the first place. He has a lot of reason to keep it manageable so I wouldn't bet on him killing the company. :)

[Guest notorious546]

same trends as last Q. lower margins, ffo, ebitda and higher payout ratio and higher debt.

 

what am i missing?

[kab60]

I don't think you're missing anything. I sold out today for a nice gain, but my assumptions were wrong. Falling FFO and increased debt wasn't what I was banking on. I think it might be interesting if they slash the dividend and refinance the debt/pay it down, but I'm not comfortable with the leverage when FFO and margins are falling.