May 27, 2010 - 11:13am EST by
2010 2011
Price: 8.80 EPS $1.50 $1.85
Shares Out. (in M): 31 P/E 6.0x 5.0x
Market Cap (in $M): 270 P/FCF 6.0x 5.0x
Net Debt (in $M): 40 EBIT 69 83
TEV ($): 310 TEV/EBIT 5.0x 4.0x

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This write-up is going to be brief, because I'm not sure how long the opportunity will last.

DJSP Enterprises, Inc. ("DJSP" or the "Company") is a foreclosure processing firm that was taken public through a SPAC transaction earlier this year.  For good background on the foreclosure processing industry I would point you to skca74's recent write-up of Dolan Media (DM).  DJSP trades at a 35-40% discount to DM on an EV:EBITDA basis (3.5x), and  a 40% discount to DM on a PE basis (5x).

DJSP is highly concentrated in the Florida market, however, through a recent tuck-in acquisition has established a national platform.  The Company is also pursuing additional small tuck-ins that will give it a presence in more pro-cyclical segments of the mortgage processing market.

DJSP traded well following closure of the SPAC transaction, reaching a high of >$13/shr.  Financial results posted since closure of the transaction have been ahead of expectations, and management's stance with respect to its business has been bullish.  Over the past couple of weeks, however, the stock has been pounded.  There are several reasons for this: 1) a preliminary F-1 was filed registering a boatload of shares, as well as registering shares that underlie the Company's outstanding warrants; concerns over the potential for this share supply to flood the market has spooked investors, 2) there was some new disclosure in the F-1 regarding new government efforts to slow/stem foreclosure proceedings, this also spooked the market, 3) the Company has not yet announced its 1Q numbers, and some investors are concerned that this indicates there are issues/problems with the accounting.

With respect to the newly registered shares, these are indeed an overhang.  However, I believe that it is highly likely that once the shares regain the $10 level, management will announce a forced conversion of the warrants (with proceeds used to pay down debt).  This will simplify the capital structure materially and should ultimately lead to some margin expansion.

The US government has indeed announced new efforts at slowing foreclosure rates.  Everything it has attempted to-date, however, has slowed rates only temporarily, and typically the beneficiaries of such programs only end up delaying their defaults by a few months.  Recent verbiage out of both Dolan Media and DJSP indicate that foreclosure volumes continue at very high rates, and the bias is for upwards adjustments to both company's earning prospects.  Most credible observers don't expect foreclosure levels to peak until late 2011 or early 2012, and foreclosure levels are likely to remain well above historical levels for many years to come.  This gives DJSP plenty of time to round out its product offering with more pro-cyclical mortgage processing products, thereby lessening the sting of reduced foreclosure rates in future years.

DJSP is likely to announce its 1Q earnings release date very shortly.  As a PFIC, the Company has 90 days to file quarterly statements, so it is still well within its statutory filing period.  This is not well understood by many investors.  I think there is a reasonable chance that management raises 2010 net income guidance on the 1Q call.

As a former SPAC, sell-side coverage is still scant.  Improved coverage going forward should help to alleviate some of the misconceptions.

The DJSP CEO has been on the road recently marketing.  His comments on the business environment have been bullish.

Until today, DJSP shares have been trading down hard regardless of overall market direction.  Clearly, some holders have been punching out w/no price sensitivity.  A one day reversal does not make a trend, but the shares appear to have finally stabilized today.

Management guidance for 2010 is $49mm of net income and $81mm of EBITDA.  Assuming no earn-out shares are issued, this equates to $1.85/shr.  Foreclosure volumes should continue to rise in 2011, leading to earnings growth.  If all earn-out shares are issued, 2010 earnings will be roughly $1.65/shr.  As an aside, the earn-outs are based on share prices exceeding certain thresholds, so the dilution is sort of a heads-I-win, tails-I-win situation since they only get triggered if the share price rises and the shareholders thereby make money.

There are plenty of things not to like about the business; future earnings declines as foreclosure slow, management took a bunch of money off the table in the SPAC transaction, some leverage on the business, etc.  However, I believe that these are more than compensated for in the current valuation.

Note as well, that if you're looking for more juice there are warrants available (strike $5/shr, callable when shares are >$10) that trade under DJSPW.


1Q earnings; M&A activity - addition of pro-cyclical mortgage processing businesses; warrant conversion + associated simplification of capital structure
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