The turnaround at Difference Capital (TSX:DCF) is gaining momentum and could be put into high gear with some successful exits, says Mackie Research Capital analyst Nikhil Thadani.
Yesterday, Thadani issued an update on Difference Capital in which he maintained his “Buy” rating and one-year price target of $2.20 on the stock, implying a return of 98 per cent at the time of publication.
Thadani, who this week took institutional investor meetings with Difference Capital management in Toronto says he is keeping a close eye on the stock’s improving Net Asset Value (NAV).
“We believe a few successful exits by DCF portfolio companies could conceivably put NAV around $2.50/sh (levels not seen in ~18 months),” says the analyst. “While exact timing of exits is impossible to predict, we believe current marks reflect conservative carrying values. In other words, we do not expect downward DCF NAV revisions, unlike frothy US private company valuations. Some investments could also be written up if underlying fundamentals have materially improved since DCF made those investments. DCF has not yet materially written investments. For example, a 2x return (late stage VC type outcome on a 5% portfolio weighted position), would add 5% to NAV or ~10¢ to DCF’s ~$2/sh NAV. Investments that could see benefits include, Vena, Vision Critical, Hootsuite, Carta, Ethoca, BuildDirect and ThunderBird among others.”
Thadani says the potential for large exits in some of the above names could bring greater balance sheet flexibility to Difference Capital and allow it to pay down more debt. He says management has already demonstrated an ability to allocate capital “judiciously and conservatively”, pointing to already implemented debt and equity buybacks.
At press time, shares of Difference Capital were even at $1.15.