After a strong rally over the second half of 2020, shares in ASX workplace management consultancy Damstra Holdings Ltd (ASX: DTC) have come off the boil more recently.
Since touching a new all-time high of $2.44 in October of last year, the Damstra share price has plunged more than 50% to just $1.13 as at the time of writing. So, what has driven the massive decline?
First, a little background on Damstra
The company develops tailored workplace management solutions for corporate clients operating in specialised industries like mining, construction and energy and utilities.
Damstra partners with these organisations to develop systems and processes that will protect the safety of their employees and also help them to meet regulatory compliance standards.
It has already racked up an impressive client list, including ASX energy company AGL Energy Limited (ASX: AGL), Swiss multinational Glencore, and construction and engineering company John Holland.
Recent financials
Damstra released its first-half FY21 results to the market in February. The company reported a 30% jump in revenue versus the prior comparative period (to $13.3 million). Despite this strong top-line growth, pro forma earnings before interest, tax, depreciation and amortisation expenses (EBITDA) actually edged down 1% to $2.5 million.
The drag on earnings came from the costs associated with the acquisition of Vault Intelligence Limited, which completed in October. Vault develops workplace management technology that helps companies involved in potentially dangerous industries such as transport and logistics, construction, or mining, to monitor their employees' safety and prevent accidents.
Despite Vault being a loss-making company, Damstra saw enough potential business synergies to acquire it.
Damstra's target for synergies for the first 12 months after the acquisition was $4 million, which it subsequently upgraded to $5.2 million in the release of its first-half results. Damstra reported that Vault had been integrated ahead of plan, with Vault's flagship safety platform, Solo, now part of Damstra's product suite.
So why the decline in the Damstra share price?
It's easy to blame the Damstra share price decline on risk-averse investors who were spooked by the company's underwhelming first-half earnings result. However, in truth, the share price decline had begun well before the release of its first-half results.
A possible contributor to the drop in Damstra's share price may simply be dilution from the Vault acquisition. Damstra issued almost 45 million new shares to Vault shareholders as part of the deal.
This flood of new shares put downward pressure on the company's share price around the same time many tech growth stocks were beginning to suffer the effects of a broader sector-wide correction.
Long-term shareholders will be hoping that this might mean the dip will only be temporary. And even in just the last few weeks, the Damstra share price has shown some tentative signs of recovery, up almost 24% since bottoming out at a lowly $0.92 in early March.
