Difference Capital still has 66 per cent upside, Mackie says

On Monday, Difference Capital reported its fourth quarter and full year 2018 financials, featuring approximately $5 million of unrealized gain on investments and marketable securities over the quarter with a net asset value per share as of December 31, 2018, of $7.21 per share, which compares to a NAV of $6.58 as of September 30, 2018, and $7.74 as of December 31, 2017.

“Thanks to two significant transactions announced after the year-end, Vena and Ethoca, we have excess cash on the balance sheet and no debt for the first time since 2013,” CEO Henry Kneis said. “We will continue to seek opportunities to prudently monetize investments and generate cash to reinvest into selective existing holdings, new private opportunities and undervalued small-capitalization public technology companies. We are not expecting any further industry trade sales in the next two to three quarters, nor any immediate IPO exits from our portfolio. However, industry merger and acquisition activity in the next nine to 18 months is quite possible, as are the opportunities for secondary sales.”

Thadani says the company’s much-improved balance sheet should provide some margin of safety, with the Q4 results not yet reflecting the progress that DCF has made so far in 2019.

“Recent positive developments could allow DCF to reinvest into selective existing holdings, new private opportunities and undervalued small-cap public technology companies, a meaningful and positive shift in focus from a couple years ago. This change has been made possible as DCF successfully redeemed ~$29 million of convertible debentures last summer without diluting shareholders,” the analyst said.

“DCF, also recently, announced a special dividend of ~10¢/sh (~$600K total outlay) and made a ~$2 million strategic investment in tech focused Waterloo real estate (~$1 million cash outlay). While, we are not expecting any DCF portfolio IPO exits, M&A driven exits and secondary sales could present opportunities to further monetize the portfolio in 2019,” he said.

Thadani says DCF has been trading at about a 50 to 60 per cent discount to NAV for about two and a half years. The analyst is maintaining his “Buy” rating while moving his target from $9.00 to $7.50, representing a projected return of 65.9 per cent as of publication date.