Cashed up Difference Capital is a buy, Mackie Research says

With its debt overhang about to be erased, investors should see further upside to Difference Capital Financial (Difference Capital Financial Stock Quote, Chart TSX:DCF), says Mackie Research analyst Nikhil Thadani, who on Thursday reiterated his “Buy” recommendation for the stock, saying that the just-announced deal by Vena Solutions should result in a nearly $1 per share NAV boost for DCF.

Trading was temporarily halted on investment firm DCF yesterday as investors reacted to news that financial planning and analysis SaaS company Vena Solution, backed by DCF, announced $115 million in new investment from two US private equity firms. DCF, which has more or less been on the decline since its listing on the TSX in 2013, finished the day up roughly 30 per cent to $3.91.

Thadani says that with more investor attention and additional catalysts the stock could reach $5.50 or $6.00.

“DCF has been trading at a ~50-60 per cent discount to NAV for ~2 1⁄2 years, given initial NAV declines, a lack of meaningful exits until last year (US real estate and yesterday’s Vena’s equity raise, which DCF monetized partially) and debt overhang,” says Thadani. “With the debt overhang now eliminated, we are optimistic, this discount can finally begin to close. Similar US names trade at a median of ~20 per cent discount of NAV. A similar valuation for DCF implies a pro forma valuation of ~$5.50-$6.00 per share.”

The analyst mentions the sale of either or both social media management company Hootsuite and cloud-based customer intelligence platform Vision Critical, both part of DCF’s portfolio, as potential catalysts.

Thadani says that although Canadian public investors have limited options when it comes to tech sector start-ups, which makes DCF potentially attractive.

“Unfortunately, Canadian investors do not have many vehicles to benefit from this private market technology sector wealth creation directly given the curious lack of quality Canadian tech IPOs in the past few years,” he says. “However, with DCF’s debt overhang eliminated, DCF could be a compelling way to benefit from this trend.”