Canaccord Genuity: Solium Capital is a buy

An estimates beat, strong market activity and a solid balance sheet are all good signs for Solium Capital Inc. (Solium Capital Stock Quote, Chart, News: TSX:SUM), according to Robert Young, analyst with Canaccord Genuity, who in a research update on Thursday maintains his “Buy” recommendation and one-year price target of C$12.50.

The equity administration Software-as-a-Service company announced its Q4 and year-end financial results on Wednesday, which showed a Q4 revenue of $22.9 million (all figures in US dollars unless otherwise noted), an increase of 21 per cent year-over-year, beating the consensus estimate of $22.1 million as well as Young’s $22.3 million.

Young states that Solium posted a modest EBITDA miss at $1.6 million, in comparison to his $1.8 million and the consensus of $2.0 million, which the analyst chalks up to one-time items and investment related to large programs.

Young is positive on the company’s progress in Q4, which saw it close 17 new deals jointly with Morgan Stanley, up from 16 in Q3, which the analyst says is a signal of strong potential for growth in the Morgan Stanley partnership.

“We believe [this partnership] and Solium’s report of strong market activity in all regions and strong bookings for the start of the year reduces risk and supports strong growth in 2018 and 2019,” said the analyst. “Upfront investment does remain a pressure on EBITDA margins in 2018 although we model steady expansion towards an eventual return to Solium’s historic 20-25 per cent target margin profile.”

The company also came out of 2017 with more cash than expected at $100.2 million and no debt, versus Young’s $97.3 million estimate, which will help accelerate growth in core and new markets, the analyst said.

Young lowered his sales and EBITDA estimates for 2018 to $106.5 million (previously $108.4 million) and $10.6 million (previously $12.2 million), respectively, but raised his sales and EBITDA estimates for 2019 to $125.6 million (previously $116.1 million) and $18.4 million (previously $15.0 million), respectively.

At 3.4x C2018 EV/Sales estimates, SUM trades at a discount to its small and mid-cap SaaS peers at 5.8x, says Young, as well as in comparison with a more targeted group of higher-growth HRIS and financial SaaS stocks at 8.3x.

The analyst’s C$12.50 price target is based on his valuation on 4x EV/2018E Sales and represents a 14.3 per cent return on investment as of publication date.