Solium Capital is undervalued, National Bank Financial says

Following the company’s $46.0-million financing, National Bank Financial analyst Richard Tse has resumed coverage of Solium Capital (Solium Capital Stock Quote, Chart, News: TSX:SUM), and he remains bullish on the stock.

This morning, Solium announced it had completed the aforementioned bought deal, which it says it intends to use for working capital and “potentially material acquisitions”.

Tse says that while this deal puts a small dent in the company’s share structure, it ultimately will lead to bigger and better things.

“While dilutive by ~8% (incl. over-allotment) in the short term, the capital enhances Solium’s capacity for acquisitions particularly as it relates to expanding the Company’s platform internationally,” the analyst says. “We see Solium becoming a technology platform leader in the equity benefits administration market through share gains in a fragmented market that’s sized around $1.6 bln. Moreover, we see growing operating leverage as recent white-label partnerships scale over the next 12-24 months.”

In a research update to clients today, Tse resumed coverage of Solium with an “Outperform” rating and a one-year price target of $12.50, implying a return of 17 per cent at the time of publication.

Tse this morning broke down scenarios for the deployment of Solium’s cash.

“With ~$67 mln of cash on the balance sheet prior to the raise – (1) how much could Solium deploy on acquisitions; and, (2) how would such a potential transaction impact Solium? We estimate the recently closed financing boosts Solium’s available cash balance to ~$80 mln pro-forma (excl. around $15 mln restricted & assume SUM acquired Capshare for ~$10 mln net). We look at what Solium might look like under the following broad assumptions:

• Solium makes an acquisition for the entire useable cash balance including the assumption of debt at a
valuation of 1.5x EV/Sales (average historical acquisition valuation).
• Target has the same Adj. EBITDA margin as Solium based on F2018E, not assuming any synergies in
this analysis (to be conservative).
• Any debt Solium takes on carries an interest rate of 5%.
• Tax rate of 35%.

Given the above, and in the absence of raising additional equity, we estimate Solium has the capacity to execute upwards of $180 mln in acquisitions. Under those assumptions, that would see over 20% accretion on F2019E. We note that F2019E assumes normalized EBITDA contribution for Solium as their partnerships scale.”

Tse thinks Solium will generate EBITDA of (US) $9.8-million on revenue of $87.0-million in fiscal 2017. He thinks those numbers will improve to EBITDA of $11.9-million on a topline of $95.5-million the following year.

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