Buy Topicus?

I read about a spinoff of Constellation Software called Topicus. What is your opinion on this company?

Q – I recently read an article with regards to a spinoff of Constellation Software (TSX: CSU). The company is called Topicus (TSX-V: TOI). It is currently trading close to its 52-week high, and from what I can decipher it’s very well-run and growing exponentially. I was hoping I could get your opinion on this company and what you see in the future for it. – Paul C.

A – Constellation Software is a very successful Canadian company so investors would naturally be interested in a related venture. Topicus was spun-off in early January 2021, with Constellation shareholders receiving 1.86 shares of the new company for each common share of Constellation they owned. Topicus immediately started trading on the Toronto Venture Exchange in the $60 range. The shares reached a high of about $136 in September of that year before pulling back. A year later, they were back around the $60 range. In short, the stock has been volatile.

The company is based in The Netherlands. It provides vertical market software and platforms to about 100,000 customers in 26 European countries.

The business is doing well. First quarter revenue was up 30% year-over-year (organic growth was 8%) to €264.4 million compared to €203.8 million in the same period of 2022. (One euro equals C$1.47.) Net income increased to €21.1 million (€0.17 on a diluted per share basis) from €20.4 million (€0.14 per share) in the prior year.

Like its parent, Topicus is growing by acquisition. The company spent €22.7 million in the quarter on new purchases.

Overall, this looks like a company with a bright future. It’s essentially trying to replicate Constellation’s success story in a European environment and, so far, is succeeding.

But – there’s always a but. The shares are trading at around $95, resulting in a p/e ratio of 93.62. That’s a high price to pay for future earnings that may or may not happen, especially considering that Europe is traditionally a slower growing economy than North America.

In sum, it’s an interesting company. But at this price it needs to be viewed as speculative. – G.P.