Solium Capital is undervalued, says PI’s Pardeep Sangha

On Deloitte’s 15th annual Technology Fast 50 list, released in November, there was a new entry; Calgary’s Solium Capital (TSX:SUM).

Solium, which has grown its revenue from just over $11-million in 2008 to $46-million in fiscal 2011 is tapping a lucrative market in sorting out the massive regulatory tangle that is stock-based compensation. The company already counts Transalta, Shaw Communications and Shell Canada -in fact 75% of the top 100 companies listed on the TSX – among its clients, and is now turning its focus to the United States.

PI analyst Pardeep Sangha says he sees future growth for Solium coming from the U.S. and international markets. Sangha points out that most corporations first manage their employee stock plans on spreadsheets before looking to migrate to a better solution. He says Solium is well positioned to capture a significant share of this market, which he estimates to be worth worth approximately $300M annually, and growing. In a research report to clients this morning, Sangha initiated coverage of Solium Capital with a BUY rating and $4.50 target price.

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On curious aspect of Solium’s makeup is that one of its biggest competitors is also its largest shareholder. Computershare owns 19.7% of the outstanding shares of Solium. Sangha believes this situation is not sustainable and it is in the best interest of shareholders if Computershare were to sell its stake in the company, something he believes would be a positive for shareholders as it would likely lead to more liquidity.

Australia-based Computershare, meanwhile, enjoys a much more generous valuation than Solium, something it shares Solium’s peer group as a whole. Sangha points out that despite having higher margins and revenue growth, Solium is currently valued on an EV/Sales ratio of 1.7x and an EV/EBITDA ratio of 7.1x FY13 estimates. Meanwhile, Solium’s peer group, he notes, is currently valued at an EV/Sales multiple of 3.4x and an EV/EBITDA multiple of 12.6x consensus FY13 estimates. Sangha chalks some of this up to the fact that Solium is a relatively small, unknown Canadian company which, until today, had no analyst coverage.

Shares of Solium Capital closed today up 1.7% to $3.05.

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