Gerrard Schmid, CEO of DH Corp., is pictured in Toronto in 2012. DH has made a handful of acquisitions since 2011, including the $1.2-billion (U.S.) purchase of Florida-based Harland Financial Solutions in 2013, which moved it deeper into the U.S. market.Matthew Sherwood/The Globe and Mail
Investors in DH Corp. are seeing big benefits from the company's aggressive shift away from its once-core cheque-processing business, toward financial technology, and analysts see more growth from its latest acquisition.
Shares of the Toronto-based company are trading near record highs and have soared by nearly 30 per cent over the past year, far outpacing both the broader market and the big Canadian banks.
DH, which a year ago changed its name from Davis + Henderson Corp., provides lending, payment and cheque-processing services to a broad range of financial services companies. While its cheque business still offers a steady revenue stream, or about 20 per cent of the business, DH has been broadening its base into more modern-day technology-based services, largely through acquisitions.
The latest is the recently closed $1.25-billion (U.S.) purchase of payment processor Fundtech, which gives DH a new product line and exposure to larger U.S. banks and financial services companies across Europe and Asia.
The company now has four divisions: payment services, which is mostly its cheque business; lending services, which helps banks and governments handle and process loans, such as mortgages; enterprise services, a banking platform used by its clients; and Fundtech's payment transaction hub.
"[Fundtech] puts DH on a different stage," said BMO Nesbitt Burns analyst Paul Condra, who recently increased his price target to $45 from $43.
While he believes the company is on the right track, Mr. Condra is cautious. He has a "market perform" (similar to "hold") on the stock, saying he'd like to see stronger U.S. growth or a better valuation before recommending investors buy.
CIBC World Markets analyst Stephanie Price has a "sector performer" (similar to "hold"), and a $44 price target, given that DH's valuation is trading in line with its newer U.S. financial technology peer group.
Still, she said the company's acquisition strategy has so far been successful, and that its dividend – now yielding about 3 per cent – will likely remain stable.
DH has made a handful of acquisitions since 2011, including the $1.2-billion (U.S.) purchase of Florida-based Harland Financial Solutions in 2013, which moved it deeper into the U.S. market.
Among eight analysts that cover DH, five have a "buy" rating, while three say "hold" or equivalent, according to S&P Capital IQ. The analyst consensus price target over the next year is $47, which is about 12 per cent higher than where it's now trading, at around $42.
RBC Dominion Securities analyst Geoffrey Kwan is the most bullish on the stock, with an "outperform" (similar to "buy") and $49 target.
"DH is one of our best ideas," Mr. Kwan said in a note, citing increasing earnings growth and exposure to the promising U.S. market. "We believe DH should also appeal to income-oriented investors," he said, noting the dividend.
Industrial Alliance Securities analyst Dylan Steuart has a "buy" and $48 target, pointing out the "resiliency of revenues" in Canada and U.S. growth. The depreciating Canadian dollar "should continue to provide a tailwind to results" in the months ahead, Mr. Steuart said.
With the Fundtech acquisition factored in, about 45 per cent of the company's revenue is from Canada, 44 per cent from the United States and the other 11 per cent from other parts of the world, including Europe, Asia and the Middle East.
DH chief executive Gerrard Schmid sees most of the revenue growth coming from Fundtech's payment processing and lending technology divisions, especially in the United States.
Mr. Schmid said the Fundtech purchase "puts us squarely at the forefront of payments technology, which is a very big deal for banks these days as they look to remain more competitive. … We see this as a very interesting way to help accelerate long-term growth at the company."
Paul Harris, partner and portfolio manager at Avenue Investment Management, has owned DH for his clients since it was trading around $10, and would continue to buy it for new clients.
"It's a growth-by-acquisition story, in a very tempered way," said Mr. Harris.
One downside, he said, is that investors won't likely see any dividend increases in the near future.
"They are good financial people and realize they would rather grow the business," he said.