Difference Capital trades at a steep discount to Net Asset Value, says Mackie

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Difference Capital Chairman & Founder Mike Wekerle.

Difference Capital Chairman & Founder Mike Wekerle.

Mackie Research Capital analyst Nikhil Thadani spent the day at Difference Capital’s (TSX:DCF) investor day and came away feeling justified about his bullish take on the stock.

In a research update to clients today, Thadani maintained his “Buy” rating and one-year price target of $2.10 on Difference Capital, implying a return of 86 per cent at the time of publication.

Thadani says that while many wish the Canadian tech IPO scene were more active, DCF provides a solid investment vehicle to gain exposure to appealing private companies such as Vision Critical, Hootsuite, BuildDirect, and Vena Solutions.

The analyst says the subject of exits that would crystallize the underlying value of DCF is always a hot topic, and he does expect at least one such occurrence that will be accretive to the company’s Net Asset Value (NAV) in the second quarter.

Thadani noted one interesting mental exercise management used to demonstrate its current value, highlighting that if the publicly traded merchant bank consolidated its proportionate share in investment companies it would have more than $25-million in annual revenue with a high recurring revenue component and would be growing revenue at more than 40 per cent year-over-year. This operating company, he notes, would be trading at less than 2x EV/Sales; which he consider a very inexpensive valuation given its high recurring revenue.

For now, the analyst notes Difference Capital continue to trade at a steep discount to NAV.

“We remain optimistic that well received Canadian technology/media IPOs could encourage more Canadian companies to utilize public markets and spur a virtuous cycle, says Thadani. “That said, we have counted only two technology IPOs year-to-date in the US. We remain hopeful to see at least one technology or media IPO this year in Canada. Likely Thunderbird Films, if we were to guess. Besides IPOs, we expect M&A exits to be more accretive to DCF’s NAV (~$1.90/sh).”

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