Topicus (TSXV:TOI) has nearly doubled since Jesse Gamble recommended it in our interview on May 28 of this year.
The Senior VP & Portfolio Manager at Donville Kent Asset Management, along with Founder & CEO, Jason Donville, are back with a couple of names that have caught their attention.
One has just gone public, has been profitable since 2015, could double earnings in 2022, and, according to Donville and Gamble, of all of their portfolio companies, has the greatest potential upside over the next 12 months.
The other company is about to go public and compares favourably to long-time winner Constellation Software.
We are always on the hunt for new, under-the-radar compounders. Here are two companies (one that just went public and one that is just about to go public) that have captured our attention:
Propel Holdings (TSX:PRL) is an online lending platform that facilitates access to credit products (including instalment loans and lines of credit) under the MoneyKey and CreditFresh brands to underbanked American consumers.
The platform is driven by its in-house technology that enables 88% of credit approval decisions to be made automatically.
With employees split between Toronto and Winnipeg, Propel Holding has over 380 employees in Canada, including a 30-person tech team in Toronto.
We participated in the Propel Holdings IPO in October 2021, and of all our portfolio companies we believe this company has the greatest potential upside over the next 12 months.
A lot of this upside is driven by the valuation difference between itself and competitors. This discount should prove to be temporary as the stock becomes better known receives its first analyst coverage.
When it comes to attributes of a potential multi-bagger, Propel Holdings checks the boxes:
- Founder-run with significant inside ownership
- Founders have started, grown, and sold a similar business
- Founded in 2011, the company has been profitable since 2015 and margins continue to improve
- Small enough size to have long runway for multi-year elevated growth
- Priced extremely cheap on 2022 estimates; well-capitalized for growth
- Forecasting close to 100% growth in both revenues and EBITDA in 2022
Meanwhile Raymond James became the first research firm to cover Propel with an “outperform” rating and a price target of $15, implying about 33 per cent upside from current levels.
Analyst Stephen Boland thinks it is an “ideal time” for investors to own the company seeing that it’s entering into a “period of high Combined Loans and Advances growth with an associated increase in revenue.
“Despite some concerns regarding the credit performance of sub-prime borrowers in times of economic uncertainty, studies have shown this segment of the lending market outperforms the prime and near-prime segments in terms of delinquencies (on a relative basis).
The robust growth in the portfolio has been driven by an expansion of products, distribution channels, and facilitating access to credit in additional U.S. States.
All are contributing to a 91-per-cent CAGR [compound annual growth rate] in Combined Loan and Advance Balances from 2018 to 2Q21.
Combined Loan and Advance Balances have increased to $80-million, up from $13-million over that time period.”
Boland expects “robust” growth over the next 18 months and the announcement of a quarterly dividend before the end of this year.
“We are assuming 62-per-cent growth in revenue in 2022 compared to 2021. As the business scales, the impact to net income accelerates, as well.
We are estimating net income increases to $34.9 million in 2022 up from $6.2 million in 2021.”
Pluribus Technologies was founded in 2018 with the goal of consolidating smaller players in the B2B software industry.
We participated in the company’s private capital raise and intend to add to our position when the company goes public in the next couple months.
We are excited about Pluribus and see many similarities with Constellation Software (TSX:CSU), which we invested in at $20 in 2009 and continue to hold today at $2,242.80.
Like CSU, Pluribus acquires small software companies ($1-$10 million of revenue) and wins deal by being vendor-friendly and by keeping management teams engaged.
Although Pluribus is focused on slightly different verticals than CSU, the company has been able to generate comparable margins in the 30%+ EBITDA range.
Pluribus recently hired a new CFO who previously spent nearly a decade closing acquisitions at the long-time compounder, Enghouse Systems (TSX:ENG).
We have always deemed Enghouse to be an incredibly astute acquirer and we are confident this new CFO will help Pluribus scale and complete at least one deal per quarter to scale M&A activity as the company grows.
Furthermore, Pluribus is starting out as a small cap company at discounted valuation, just like CSU used to be.
Based on our estimates, Pluribus should be able to grow at a faster rate than other consolidators, such as CSU and Enghouse, while also having a projected stock price at half the multiple.
Our advice to investors is to stay focused on the direction of fundamentals: revenue growth, as well as the direction of margins and earnings growth.
Fundamentals drive long-term performance and we are seeing incredible momentum in our portfolio companies’ reported earnings.
We eagerly await for our portfolio companies to announce their Q3 earnings in the coming weeks, which should prove to be one of the strongest quarters of 2021 and stocks should react accordingly.
With a mere eight weeks left of the year, we are seeing green shoots throughout the economy and are quite positive on the direction of the market for the end of 2021 and into 2022.
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