The Facts (as of Aug 19, 2010)

Unit price: $6.80. Book value per unit: $6.39. Market cap: $160 million (small). Distribution: $0.09656 per month or $1.15872 per year. Yield: 17%. P/E: 12.4x. This is an income trust, and the new tax regime means that they will likely need to cut their distribution in order to pay their tax bill beginning 2011. They also plan to convert to a corporation, which will incur some cost.

The Story

The DATA Group Income Fund is a leading provider of document management solutions including printed products. Founded in 1959, the company operates 24 facilities across Canada and has a leading market share in the total document management services segment.

The DATA Group provides its customers with a broad range of customized printed products and related services, which include a comprehensive approach to helping customers better manage the total systemic costs of their documents.

In early 2009, unit price reached $9.55, a post-crash high. The company is still struggling to regain its prior profitability. Advertising volumes are down, but with competitors going bankrupt, market share has increased. The company feels they are well positioned to benefit from a recovering economy, but they aren’t seeing the benefits yet. Their approach in the “total document management” segment is to design, produce, distribute and store printed materials more cost effectively than a company or government department could do themselves. In this way, they benefit symbiotically with their clients.

Pros

This little-known company is quite volatile, but can provide the investor with returns in two ways. Assuming management is able to execute their strategy, the share price will rise at the same time as the distribution provides income. The shares are moderately liquid, but there’s little chance of an institution being able to buy a large amount, meaning less competition for the small investor.

Cons

The company experienced a small loss in the most recent quarter, due to the cost of refinancing their debt. This was a one-time charge, but they are also still struggling with the “one-time” integration costs of their purchase of Relizon Canada in 2006. The use of paper documents will probably decrease in favour of digital in future, although the company could still provide their design and distribution services. The upcoming taxation will most likely result in reduced distribution.

Impression

The company has government and large corporate customers and functions in a way that reduces cost to them. It seems stable and well-managed. When they convert to a corporation, they can reduce their payout to something that is sustainable and allows enough cash for the company to grow. This seems like a great time to buy, while the share price is still low after the recent bad news. Even if the distribution is cut 35%, it will still yield around 10% on today’s purchase price. It also seems unlikely that the share value will fall further, so there are two ways to benefit. If the share price recovers to the recent high of $9.55, that’s a 40% increase added to the 17% yield. With that kind of potential, I can afford to be patient.

The Data Group DGI.UN

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