Topicus is my Top Pick, this portfolio manager says

You may not know the name but software company Topicus.com (Topicus Stock Quote, Charts, News, Analysts, Financials TSXV:TOI) has been a smashing success so far in its run on the TSX junior board. How good? The stock has about doubled since it emerged in February as a spin-out from Canadian software consolidator par excellence Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU).

And while CSU is certainly a known entity to most tech investors, the spinout Topicus should be catching your eye even with the big gains it’s made this year. So says Jason Del Vicario of Hillside Wealth Management, who just named Topicus as one of his top picks for the upcoming 12 months.

“Topicus is going to do exactly what Constellation Software has been doing, but of course they’re smaller, and so we think that they can probably grow a little bit more rapidly than the parent company,” Del Vicario said, speaking on BNN Bloomberg on Wednesday.

“Constellation Software has about a $45 billion market cap, but this is a company that’s listed on the Venture Exchange, which is kind of interesting — I think they’ve done this to kind of keep it off the radar. It’s done very well,” he said.

The Topicus story goes back to 2013 when Constellation made the major purchase of Total Specific Solutions of the Netherlands for €240 million, a company which like CSU focuses on acquiring smaller companies with strong positions in niche software markets, with TSS at the time working in the healthcare, government and financial sectors. 

Fast forward to May of last year and Constellation, through its TSS operating group bought Dutch diversified vertical market software provider Topicus and then put both companies under the operating group called Topicus.com with the intention of listing as a public company.

“We have been following the impressive development of Topicus since its beginning in 2001,” said Robin van Poelje, CEO of TSS, in a press release in May 2020. “The company has been growing through acquisitions, but predominantly organically. Its portfolio is not directly competitive with ours. Both companies will operate stand-alone in our decentralized organization model.”

The goal of a public listing was achieved this year in February after Constellation divvied up about 39 million Topicus shares to CSU shareholders while Constellation itself retained about 30 per cent TOI. 

Del Vicario said the creation of Topicus.com may be a repeated feat by Constellation, seeing as how successful TOI has been.

“The people who ran who run Topicus and TSS wanted a separately listed entity, so that they in their their customers and their employees could have pride in the fact that it was still a sort of a Dutch focused separately listed company, but owned by constellation software so constellation software, clearly saw enough value in the prospect of combining the two and spinning them out,” Del Vicario said.

“We added to our position on weakness in the in the low $70s and it has since shot up to about the mid-$140s and it’s come off a little bit,” he said. “We would like to add to our position at lower prices. And we would also suggest that Constellation Software may do more of this in the future. This has been a very successful spin out for them so we would expect more of this in the future.”

By the numbers, Topicus released its second quarter 2021 earnings in early August where it showed revenue up 54 per cent year-over-year with eight per cent organic growth to €178.2 million. Net income grew to €168.8 million or €0.11 per share compared to €14.1 million or €0.12 per share a year earlier.

The company said a number of acquisitions had been made over the quarter for cash consideration of €5.2 million while since the end of the quarter Topicus completed or entered into agreements to acquire further businesses for aggregate cash of €49.6 million. 

Topicus debuted on the TSXV on February 2 at $66 per share and has mostly been trending up since then, hitting a high of $140.65 on September 16.

Normally taciturn about his company’s business, Constellation Software’s CEO Mark Leonard made a statement about Topicus at the time of its acquisition by CSU and TSS last May, saying both TSS and Topicus “didn’t want their legacy disappearing into the craw of an omnivorous conglomerate,” and so Constellation would give the newly merged company autonomy as well as an identity, with a public listing serving to support those ends.

“I cannot think of another vertical market software company that has achieved Topicus’ size without using outside shareholder funding,” said Leonard in a May 20, 2020, press release. “I look forward to spending more time with the Topicus founders as travel becomes easier.  I’m an old dog, but I’m certain that they have new tricks to teach me. More importantly, they have experience and practices that can benefit all of the Constellation operating groups.”