Difference Capital will trade up on real estate deal, says Mackie Research

Expect shares of venture capital and private equity company Difference Capital Financial (Difference Capital Financial Stock Quote, Chart, News: TSX:DCF) to trade up on news of its recent real estate deal, says analyst Nikhil Thadani with Mackie Research Capital, who forecasts DCF’s net asset value in Q4 to benefit from the sale.

In a note to clients on Thursday, the analyst reiterated his “Buy” rating and $9.00 target price for DCF.

Yesterday, Difference Capital announced the sale of its indirect stake in a 618 acre parcel of undeveloped land in Rancho Mirage, California, just south of Palm Springs. The company reported initial cash proceeds of approximately $14.3 million, representing a realized gain before US taxes of approximately $7.7 million (all figures in Canadian dollars).

“The disposition of this investment has significantly improved our ability to repay our outstanding debentures in a manner non-dilutive to shareholders, which has been an important focus for the Company,” says Henry Kneis, Chief Executive Officer of Difference Capital, in a press release.

The sale could help the company with some debt refinancing, says Thadani, who also notes that the recent exit from credit protection of e-commerce company BuildDirect (one company in DCF’s portfolio) could have a slight but positive impact on Difference’s net asset value as well as improve DCF sentiment.

“While these developments should aid NAV, more importantly, we expect increased liquidity and improved NAV to aid the stock’s valuation relative to NAV,” says the analyst. “DCF stock trades at ~35 per cent NAV (Q3/17) versus an average of ~55 per cent since we launched coverage two years ago. This discount, is, in effect larger – NAV, on Monday evening, with Q4//17 results is likely to be marked up on this real estate sale,” he says.

Over the first part of 2018, DCF’s share price is down 33 per cent. Thadani’s $9.00 target price represents a 215.8 per cent return on investment at the time of publication.

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