Difference Capital has a 200 per cent upside, Mackie Research says

Even with Canada’s so-so tech IPO environment, venture capital and private equity company Difference Capital Financial (Difference Capital Stock Quote, Chart, News: TSX:DCF) should outperform over the near term, says analyst Nikhil Thadani of Mackie Research Capital, who on Tuesday reiterated his “Buy” rating and $9.00 target for DCF.

Difference Capital reported its fourth quarter and full-year ended December 31, 2017, financials on Monday, posting a net loss for the year of $1.2 million or $0.20 per share, compared to a net loss of $12.9 million or $2.20 per share for the previous year. The company also reported Q4 net asset value of $7.74 per share, an increase over Q3/17’s $7.04 per share.

Despite the small number of 2017 IPOs in DCF’s tech and media wheelhouse, the company says that it’s looking ahead to 2018 and primarily focusing on the overall liquidity of its balance sheet.

“We continue to believe our $67 million portfolio of late stage private and early stage public technology, media and healthcare companies is well positioned for growth and liquidity events,” the company said in a press release. “Technology investments like Mogo Technologies, Vision Critical, Vena Solutions, Ethoca, and Hootsuite are all seeing strong growth and are well-funded. Our media investments like Blue Ant Media are well positioned in a rapidly digitizing media market, and our medical device companies like Cardiac Dimensions and Brainscope are well along the path of commercialization.”

Thadani says he expects DCF to trade up on more liquidity improvement since this past week.

“DCF now trades at <40 per cent reported NAV, the lowest level in ~5 1⁄2 years,” said the analyst in an update to clients. “Even with our estimated Q1/18 NAV re-trace (accounting mark to market driven) of ~$1/sh, the stock trades at the lowest level relative to NAV in over two years.”

“The company indicated a pro forma cash, cash equivalents and distributions receivable position of ~$26 million (we expect a tax bill to be paid in H1/18 in addition to opex and Q1 debt service),” said the analyst. “As such, we suspect DCF could find additional liquidity in the ~$5 million range, given the current portfolio of ~$70 million — perhaps via debt extension and/or refinancing. As such, the probability of DCF meeting debt obligations with common shares (dilutive given NAV discount and therefore an overhang on the stock) is the least since we launched coverage in early 2016.”

Thadani’s $9.00 target price represents a 200 per cent return on investment at the time of publication.

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