Description

Thesis:

DNB is a high-quality franchise with a dominant market share in commercial credit reporting.

It has outstanding mgmt and backers in Bill Foley, his team from Black Knight (including BKI’s CEO Anthony Jabbour) and other PE heavyweights like Chinh Chu (former head of PE at BX who serves as a director and holds >2.5% stake in DNB) and Thomas H Lee Partners (24% stake). Foley led entities Cannae and Black Knight together own ~30% of DNB.

Topline growth is expected to re-accelerate as COVID headwinds dissipate, and efforts to overhaul technology, products and sales practices continue to bear fruit. Cost cutting has already resulted in significant margin improvement (EBITDA margins >800bps above pre-LBO levels)

DNB is now poised to see EBITDA inflect upward as an acceleration in growth combines with much improved margins to generate strong operating leverage.

Shares are attractively valued as they are now trading below the IPO last July, despite continued turnaround progress, and trade at a substantial discount to peers (sub-14x ’22 EBITDA vs. peers ~20x).

DNB should trade at ~18x near term (representing a 2x discount to peers due to relatively high leverage), which translates to ~$28/share or ~30-35% upside vs current levels.

Longer term, once deleveraging and turn around efforts are complete, DNB should trade on par with analytics and financial info Service peers (~22-24x EBITDA), which translates to >$40/share based on cons. ’22 EBITDA

An increase in the available float along with a longer track record post IPO should also be a tailwind for DNB shares.

Company Overview & Recent History – DNB is a leading provider of business decisioning data and analytics. Its core credit risk business functions similar to a credit bureau for commercial credit. With a history dating back to the 1800s, DNB is arguably one of the first pioneers in ‘Alternative Data’ as it is best known for its proprietary database (now on the cloud and featuring >420m business records) & the ‘D-U-N-S Number’ (essentially a ‘Social Security Number’ for businesses). Besides commercial credit where DNB has #1 market share, the company has expanded into adjacencies like governance & risk and sales & marketing. DNB also provides a wide range of products and services for research and insights on global business issues. Areas such as supply chain and KYC have seen double digit growth, and new products based on unique alternative data subsets (such as foot traffic and shipping containers) have been well received.

Commercial trade credit and related products are housed within the Finance & Risk (F&R) segment[1] (~60% of revenues ex-corporate), while its Sales & Marketing segment[2] (~40% of ‘20e topline ex-corporate) focuses on helping clients target and maximize opportunities via variety of products that leverage DNB’s various data sets.

After decades of neglect and mismanagement, DNB was taken private in 2019[3] by a consortium led by Bill Foley. This marked the 3rd time DNB has had new leadership in past ~10yrs (DNB had also been the target for acquisition several times but rejected offers in 2012 and 2017). DNB returned to public markets in July 2020 via IPO at $22/sh. PE firm Thomas Lee partners has a 25% stake in DNB while Foley related entities have ~30% stake.

New owners began a multiyear turnaround plan to revamp Mgmt and update both technology and products. The ultimate goal is to reinvigorate organic growth, while also moving its customers base toward a more predictable recurring revenue model (ie multiyear contracts with escalators/improved product pricing), and rebuilding DNB’s competitive moat around the core commercial credit reporting segment. International expansion is another focus after prior Mgmt had divested numerous international assets. DNB recently completed the acquisition of EU focused Bisnode.

DNB currently remains in transition, as COVID has been a modest headwind to US revenues over the past ~5 Qs, but the transformation plan remains on track with more synergies to be realized. FY20 sales of $1.74b, were up ~2% YoY from 2019, an acceleration from the sluggish sub 0.5% avg growth seen in the prior decade. Organic growth is expected to continue to ramp over the next 2yrs (mgmt. targeting 3-6%, which is in-line with industry organic growth trends of ~mid-single digits). EBITDA margins are now >800bps above pre-LBO levels, and consensus has them expanding another ~200bps by ‘22, approaching ~41% (vs. 30% prior to the LBO, and peers are ~40%). The recently completely Bisnode acquisition should further add to growth projections given deal is expected to be accretive in 2021 and Bisnode is growing faster than rest of DNB (note, DNB used to resell some of Bisnode’s products, but these revenues have been reclassified post merger and are margin dilutive). Leverage ratio (TTM) stood at 4.6x as of Q1’21 Mgmt expects to delever into the high 3s by year 2021.

Key Highlights

• Despite poor execution under prior Mgmt, DNB remains a desirable asset given its durable model (>85% recurring rev + 96% retention rate), strong competitive position (only scaled game in Commercial credit) and low regulatory risk (given commercial rather than consumer focus)
• Shares are back to their IPO levels of ~$21 after declining following Q1 results which were ~in-line but showed a slight dip in margins and Q1 organic growth remained relatively subdued due to COVID. However the LT story remains intact and turnaround efforts continue to make progress
  • DNB’s technology upgrade effort dubbed “Project Ascent” kicked off in Q2’20, and aims to upgrade select parts of the data supply chain over the next few years to both drive improved performance and efficiencies.
    • Transition to cloud is currently only ~70-80% complete (up vs pre-LBO levels, but still well below Mgmt’s target of 90%
    • Besides enhancements, Mgmt has also put significant focus on its internal databases and operations, particularly in terms of cleaning up data quality issues (which had plagued the company in the past) and improving customer service to ensure better responsiveness by DNB
  • Cost cutting efforts have been impressive as Mgmt has already achieved their initial $200m cost savings target, and is on track to surpass $250m, (note this is a net figure as some of the cost savings have been reinvested into data offerings and salesforce to help innovate products/offerings and improve revenue)
    • Recently announced plan to relocate their HQ from NJ to Jacksonville, FL also should allow DNB to further cut costs
  • Q1’21 Results showed that Efforts to modernize technology and sales practices have already begun to bear fruit
    • Cross selling was up 60% in Q1 as their 22 new partner datasets saw very positive reception
    • 40% of biz now under multi-year contracts (up from 36% at YE’20 and 13% pre-LBO) and Mgmt hopes to get this up to ~60%
      • Mgmt noted that ~70% of these contracts are going up in price (vs. flat previously)
    • Note Q1 saw Organic revenue up ~1.3% YoY which at first glance seems sluggish relative to Mgmt’s guidance 3.0 – 4.5% for FY21, but Q1 has historically been the weakest Q due to seasonality, and this is an marked improvement vs the declines seen in Q1 over prior years
  • New and upgraded products coupled with Multi-year contracts should translate to a more profitable and predictable stream of recurring revenues. Especially relative to credit bureau peers, who’s business has historically been more cyclical due to consumer exposure.[4] DNB also has higher recurring revenues (~85%) than consumer bureaus and is more similar to financial info services and analytics peers (~65-99% recurring)
• International expansion offers significant room for growth, along with other advantages related to scale (better margins and increased access to data)
  • International revenues account for < 1/3rd of total (mostly in the UK and Eurozone regions, and to a lesser, extent, the Asia-Pacific region)
  • DNB has relatively low penetration among international firms relative to North America (~60-70% of Global 500 as clients vs. ~90% share of Fortune 500).
  • The international growth strategy will include launching local versions of current solutions with focus on cross-selling, upselling and winning new clients, particularly with the sales and marketing related solutions. 
• Significance of Foley cant be understated here – Especially when DNB falls directly in his wheelhouse (financial/info tech) and we’ve basically seen this same story before with Black Knight
  • Foley has led numerous successful business and is a master deal maker. Despite being well into his 70s, Foley remains extremely active, as he recently led several SPACs
    • Foley started with Fidelity National Title (mortgage insurer) where he was the founder and served as CEO. He later served as Chairman of Fidelity National Information (FIS), a leader in financial services technology focused on payments). He is the current Chairman of Fidelity National Financial (FNF) since 2005. At both FNF and FIS, Foley had a history of exceeding synergy targets on acquisitions[5]
    • SPACs include Foley Trasimene Acquisition Corp I and II (Alight & PaySafe), Austerlitz Acquisition Corp I (WynnBet) and II
  • BKI is an almost identical story to DNB
    • Black Knight is a Finance/Real estate technology company that was taken over by Fidelity National and spun out again in late 2017
    • BKI’s mortgage servicing platform has a leading market share among first and second lien mortgages. The company also has numerous related software/analytics products
      • Similar to DNB, BKI had to upgrade its data/technology and rollout new products
    • Foley was Chairman of BKI from ’14-17
    • DNB’s CEO Anthony Jabbour is also the CEO of BlackKnight and has been a Foley Lieutenant for decades (also served at FNF)
    • BKI’s Market cap now stands at >$10b vs. $1.5b at 2015 IPO
  • Cannae, Black Knight and Chenh Chu’s CC Capital all bought into private placement concurrent with the IPO rather than cashing out
• In terms of capital allocation, debt paydown is currently the main focus, but tuck-ins and other small acquisitions (focused on adding new data sets, and other analytical/software capabilities) are also likely
  • Besides Bisnode, DNB already has already done three recent tuck-in acquisitions to beef up its offerings – Lattice Engines (~$125M purchase price), Orb Intelligence, and CoAction ($10-15M each)
  • In the medium term, given Foley’s businesses have shown a willingness to take swings on bigger assets, DNB could be used as a platform for further consolidation in the data space.
• FCF likely to remain constrained near term as Mgmt increases capex to bolster DNB’s competitive moat
  • Capex spend was at $60M pre-LBO in 2018, and increased to $75m in 2019, ~$120M in 2020 and is projected to grow to ~$160m in 2021 (represents ~7.5% of ‘21e revenue vs. industry avg of ~6% of revenue)
  • Capex is seen as important in terms of DNB maintaining its competitive advantage given industry dynamics which include relatively high barriers to entry (i.e. lots of capex required to replicate current datasets/products) and low switching rates in underwriting/risk mgmt products (b/c of customers want to rely on a trusted brand).
    • DNB has to catch up after underinvesting during the prior decade, allowing peers to gain some in-roads. Above mentioned data quality issues had also weighed on brand/trustworthiness.

Valuation:

DNB trades at ~20x consensus ’21 EPS vs. credit peer median/average of ~34x (Experian & Equifax both at ~33x, FICO at 43x and TRU at 30x) and vs. analytics peers ~40x, and Financial Info service peers at ~29x (Moody’s, Factset, S&P)

On EV/EBITDA Basis, DNB trades at ~14.7x ’21 EBITDA and ~13.7x ’22 EBITDA. This is a ~4-5x turn discount vs. Consumer Credit Bureaus (which Avg of ~18-20x ex-FICO which trades much higher) and ~6-7x discount vs Analytics & Financial Info Svc peers (which trade at ~21-22x ’22 EBITDA.

DNB is more highly levered than the rest of its peers with Net Debt of ~4.0x ‘21e EBITDA vs. credit bureaus at ~2.1x, analytics peers at ~2.5x and financial info svc peers at ~0.5x.

Consensus projects DNB Revenues growing at ~11% CAGR through 2023 vs. credit bureaus at ~9%, analytics peers at ~10% and financial Info Svc peers at ~6%

Risks

Organic growth remains low

Competition Intensifies

Secondaries to de-lever

Strategic backers exit (Foley related entities CNNE & BKI own ~30% and PE fund Thomas Lee owns ~24%)

Comments earlier this year indicated that Foley is not anxious to dispose of any shares as he sees a lot of upside near term, meanwhile selling would be a last resort should Cannae need liquidity.

[1] This unit provides fixed price subscription contracts for access to global information, comprehensive monitoring and portfolio analysis. It also provides business information reports consumed in a transactional matter. F&R Segment has a comprehensive suite of products including Finance Analytics (global credit data), Credit Builder (credit history), Enterprise Risk Assessment Manager (credit decisioning), coAction (automate collections), and Supplier Risk Manager (supply chain risk) solutions.

[2] Sales & marketing solution segment provides subscriptions for continuous access to DNB’s marketing info and business reference databases. These data-driven analytics and solutions are targeted to clients to use as part of its sales and marketing targeting strategy. These services include cleansing client data, prioritizing leads, account-based advertising, and TAM and lead segmentation. Solutions include Optimizer (continuous client data hygiene), D&B Direct (integration with CRMs), Lattice Atlas (customer segmentation), and D&B Hoovers (sales platform)

[3] In August 2018, DNB announced a go-private transaction with Bill Foley (Cannae Holdings, Bilcar), CC Capital, Black Knight, and Thomas H Lee at ~$7B enterprise value (12.7x FY17 EBITDA and ~3.8x revenue); closed February 2019.

[4] Credit Bureaus have sought to lower their exposure to the credit cycle by diversifying away from the most cyclical verticals like financial services, toward verticals like Insurance and health care. While this helped limit some of their downside they are still far from immune, and remain more cyclically exposed than business/info services companies which are more subscription based (subscriptions are less than 10% of revenue for credit bureaus)

[5] See FNF/LPS, FIS/Metavante, FNF/Land America, FIS/eFunds, FIS/Certegy, FNF/Intercept, FNF/Aurum, FNF/Chicago Title. Foley surpassed initial targets on all of these by ~40% on Average.

Catalyst

• Execution on turnaround begins to bear fruit in future Qs as organic growth re-accelerates
  • COVID is no longer a major headwind especially for SMB and new products enable more cross selling/upselling
  • International expansion continues to gain traction as successful integration with Bisnode leads to more large client wins and synergies
  • Investors will likely also grow more comfortable with DNB after several Q’s as a public company again
• Refinancing
  • DNB has $450m of $6.875% bonds that they could look to refi at lower cost
• Delevering allows for re-rating vs peers and further M&A –
  • At 4x leverage, DNB is more highly levered than Consumer Focused Credit Bureaus and other Financial Info/analytics peers
  • Foley may look use DNB as a platform for acquisitions in the Fintech/financial analytics space, and has commented that he expects DNB to remain acquisitive
• Insider purchases
  • Note several backers have increased their stake after the IPO
    • We saw some of this several months ago when CEO and CFO bought shares
      • Note, CEO Jabbour had also subscribed for 200k shares at the time of the IPO
  • Other backers like Chinh Chu (CC Capital) further increased their stake substantially since the IPO (Chu also participated with the private placement concurrent with the IPO alongside BKI & CNNE)
  • Likely to see more of this if shares continue to trade at current levels
• Free Float & Volumes Increase
  • Currently float is constrained ~39-40% of shares OS
    • This should increase over time as DNB does more acquisitions (using stock as a component)