Difference Capital is very undervalued, says Mackie Research Capital

Difference Capital Financial (Difference Capital Stock Quote, Chart, News: TSX:DCF) has been getting its house in order to the point where investors can now focus on potential positives, says Mackie Research Capital analyst Nikhil Thadani.

In a research report to clients today, Thadani initiated coverage of Difference Capital with a “Buy’ rating and a one-year target price of $2.00, implying a return of 90 per cent at the time of publication.

Thadani says that the actions of Difference Capital’s management since 2014 has improved its foundation for success. He notes that after 2014 writedowns for 2012 investments, DCF in 2015 has de-levered its balance sheet, collapsed a “confusing” external manager agreement and provided multiple “value-confirming” exits through M&A’s and IPOs. He says that with portfolio writedowns that appear to be completed, investors can now focus on some of the high quality names in Difference’s stable, and their potential for upside.

“We are bullish on Canadian tech,” says Thadani. “We believe IPO driven exits are more likely to have a better impact on DCF’s stock price/NAV valuation. DCF has thus far not benefitted from this dynamic as Canadian technology IPOs have remained sporadic and the number of Canadian tech IPOs over 2014-2015 may have been lower than expected.”

The analyst says he anticipates more activity that will enable DCF to realize gains going forward.

“We expect DCF to benefit more from M&A exits in 2016 (vs. IPOs),” adds Thadani. “However, Canadian VC activity provides a positive funnel for potential future IPO opportunities. Widely anticipated Canadian technology IPOs such as BuildDirect (DCF portfolio name), Desire2Learn (D2L), Hootsuite (DCF portfolio name), Vision Critical (DCF portfolio name) could provide a widely appreciated catalyst to the Canadian technology ecosystem and also benefit DCF.”

Thadani notes that Difference Capital has DCF has more than $110-million in assets under management as of Sept 30th 2015, and also now has more than $160-170-million of tax loss assets. With a closing price of $1.10 Tuesday, the company had a market capitalization of just $31.99-million.

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