DLH Holdings: Still A Lot Of Upside Left (NASDAQ:DLHC)

I last wrote on (NASDAQ:DLHC) in December 2022, and I was bullish about it. It has risen around 27.5% since then, but still, I think it hasn’t lived up to its potential. I think it has way more potential, and it is looking good for FY24. I will discuss the reasons behind it. I assign a buy rating on it as I think it can deliver solid returns in the coming times.

Financial Analysis

It announced its Q4 FY23 and FY23 results. The revenue for Q4 FY23 was $101.4 million, a rise of 51% compared to Q4 FY22. The major reason for the significant rise in revenues was the positive contribution from the GRSI acquisition, which it acquired in December 2022. Other than the acquisition, its organic growth in existing businesses was also strong. The income from operations was $0.1 million in Q4 FY23, which was $4.7 million in Q4 FY22. The decline was due to a non-cash impairment charge of $7.6 million. Excluding the charge, its adjusted income from operations was $7.8 million. Its net loss for Q4 FY23 was $2.6 million compared to the net income of $3.4 million in Q4 FY22. Its profitability was affected by higher interest expense. The interest expense in Q4 FY23 was $4.7 million, which was $0.4 million in Q4 FY22. The debt related to the GSRI acquisition increased the interest expense.

The revenue for FY23 was $375.8 million, a decline of 4.8% compared to FY22. FY22 revenues included short-term contracts worth $125.8 million in response to Covid. So excluding the short-term contracts, its FY23 revenues were 39.5% higher than FY22. Increased expenses due to acquisition and higher interest expenses due to high debt affected its profitability in FY23. The results might not look strong by the numbers, but I believe FY23 turned out to be a positive year for the company. They were able to successfully integrate the GSRi acquisition, and it is now positively contributing to their business. I stated in my last report that this acquisition would have an impact on the company’s balance sheet but would boost the company’s growth, and both turned out to be true. In FY23, the acquisition-related costs impacted its profitability, but it also boosted its revenue growth. Talking about profitability, increased interest expense affected them in FY23. However, I see another positive here, which is that the management has stated that debt reduction will be their priority going forward, and we can already see the results. Its total debt by the end of FY23 was $179.4 million, which was $207.6 million in December 2022. So, the debt reduction will increase the profitability going forward. Additionally, the company is experiencing strong demand. Its contract backlog has increased to $704.8 million in FY23, which was $482.5 million in FY22. So, I think FY24 might be a solid year for them due to the successful integration of acquisitions, strong demand, decreasing acquisition-related costs, and debt reduction.

Technical Analysis

It is trading at $16.3. The long-term chart of DLHC is looking quite bullish. After being in a downtrend from 2021 to 2023, I finally saw signs of a trend reversal in the stock. The stock has broken the lower highs and lower lows structure and formed a new higher high. So, the stock breaking the structure after two years shows bulls are gaining strength. The other bullish sign that I see is that the stock price has broken an important resistance zone of $15 after consolidating for about three months. Considering these two factors, I think that the stock might see a trend reversal in the coming times. I see it reaching $21 in the short term because the next big resistance zone is at $21, and currently, I don’t see any major resistance that might stop the stock price before $21. Hence, I am bullish on DLHC.

Should One Invest In DLHC?

DLHC has an EV/Sales [FWD] ratio of 1.03x, which is lower than the sector median of 1.77x, and has an EV / EBIT [FWD] ratio of 14.36x compared to the sector median of 16.34x. So DLHC is looking cheap valuation-wise, and honestly, it hasn’t delivered what I expected the last time I covered it. However, I think it can be rewarding in FY24 because it is looking financially strong going into FY24, the technical chart suggests a trend reversal, and the valuation seems cheap. Hence, I assign a buy rating to it.

Risk

A considerable amount of their revenue is derived from contracts with the VA and HHS; thus, their continued business with these organizations is essential to them. It is impossible to predict how many services they will actually end up providing to VA and HHS under their current contracts or whether their attempts to recompete will be successful. It is anticipated that solicitations for renewal would be issued in relation to their contracts with the VA for the provision of services to its CMOP activities. If they were unable to maintain their relationship with any of these clients, lost any significant current contracts, or saw a material reduction in the amount of services they offer them, their financial condition and operating results would all be materially harmed.

Bottom Line

DLHC hasn’t delivered what I was expecting. However, I think it can be rewarding in the future. It is looking good going in FY24. It has a strong backlog and reduced debt, the acquisition is proving beneficial, and the technical chart looks solid. So, I assign a buy rating to it.