Veracap Launches Mid-Market Technology Index

While there is an S&P/TSX Information Technology Sector index, it consists of just six companies and five of those have a market cap greater than a billion dollars.  Due to the small number of companies included, it is susceptible to company specific risk influences.  As an example, the S&P/TSX Information Technology sector index was down 18.5% January to November 25^th largely due to RIM falling over 70% during this period.

The Veracap Technology Index (the “VTI”) includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million.  As at November 25, this included 75 companies.

There are 179 technology companies listed on the TSX and TSX-V, further segmented in the following subsector classifications: Hardware & Equipment, Internet Software & Services, Communication Technology, Software, and IT Consulting & Services.  As at November 25^th, 88 listed companies had a market cap of less than $10 million and the average market cap in the VTI is $70 million.

We feel the VTI is a better representation of Canada’s vibrant mid-market technology sector.  The VTI composite share price outperformed both the S&P/TSX Composite Index and the S&P/TSX IT sector index since the beginning of 2011 with a year to date return of -8.4% versus -14.7% and -18.5% respectively.  Technology sector valuation multiples crossed the S&P/TSX Composite index in mid August as the latter was dragged down by falling commodity prices. 

Since the beginning of 2011 VTI companies have been trading at an average valuation of around 9.0 times LTM EBITDA.  The strongest subsector, in terms of valuation multiples, was the Software sector where companies such as Guestlogix, Redknee Solutions and March Networks contributed to an average LTM EBITDA multiple of 12.9. The Communications Technology subsector brought up the rear with companies such as Aastra Technologies, Sangoma Technologies, and C-Com Satellite Systems trading below four times LTM EBITDA.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.