Is Information Services Corporation (TSE:ISC) a Hidden Gem with a 49% Undervaluation?

The valuation of Information Services Corporation (ISC.TO) presents a rare paradox. At CA$32.00 on June 19, 2025, its stock trades nearly 49% below a discounted cash flow (DCF) estimate of CA$63.82, yet analysts' median price target sits at just CA$32.70—a figure barely above current levels. This disconnect between intrinsic value and market skepticism invites scrutiny. Could ISC, a Canadian tech and services firm, be a hidden gem overlooked by investors? A closer look at its financials, strategic position, and catalysts suggests the answer is yes—provided risks are properly weighed.

The Case for Undervaluation: A DCF Perspective

The DCF valuation hinges on ISC's monopoly in Saskatchewan's land registry and its dominance in technology solutions for government and corporate clients. These segments generated record revenues and adjusted EBITDA of CA$182 million in 2024, driven by recurring contracts and cost discipline. The DCF model assumes modest growth (5% annually) in core operations and accretive acquisitions in adjacent tech markets. Even with conservative assumptions, the CA$63.82 fair value implies ISC trades at just 6.5x forward EV/EBITDA, far below the 12x-15x multiples typical for software and services peers like CGI Group (GIB.A).

Critics argue the DCF overestimates growth potential. Yet, ISC's cash flow generation is robust: it returned CA$25.3 million to shareholders via dividends in 2024 (a 2.4% yield) and retains ample liquidity (CA$120 million) to pursue acquisitions. The recent completion of Plantro Ltd.'s CA$30-per-share tender offer (up from CA$28 in May) signals strategic interest, further validating its intrinsic worth.

Why the Analysts Lag: Skepticism and Short-Term Noise

Analysts' muted targets reflect two concerns: sector consolidation risks and regulatory headwinds. Some fear ISC's land-registry monopoly could attract antitrust scrutiny, while others doubt its ability to expand beyond Saskatchewan. However, these risks are overblown. The Saskatchewan government, ISC's largest client, has no incentive to disrupt a stable, efficient system. Meanwhile, adjacent growth opportunities—such as digital identity verification or blockchain-based record-keeping—are underexploited and could unlock new revenue streams.

The NCIB (Normal Course Issuer Bid) announced on June 4, 2025, underscores management's confidence. By repurchasing shares, ISC is countering undervaluation directly, though its CA$1.4 million daily trading volume (as seen on June 19) suggests limited investor urgency.

Catalysts for Revaluation: Growth and Governance

Three catalysts could narrow the valuation gap:
1. Sector consolidation: With Plantro's tender offer completed, other buyers may emerge. ISC's low leverage (net debt/EBITDA of 0.5x) positions it to pursue bolt-on deals.
2. Dividend upgrades: A CA$0.23 quarterly dividend (announced March 2025) leaves room for hikes. A 50% increase would lift the yield to 3.5%, attracting income investors.
3. Peer re-rating: As Canadian tech stocks rebound—post-pandemic underperformance and AI-driven efficiency gains—the market may reassess ISC's underappreciated cash flows.

Risks and Model Assumptions

The bull case assumes ISC can:
- Avoid regulatory disruption.
- Execute on tech expansion without overpaying for acquisitions.
- Maintain margins amid rising labor costs.

Should any of these fail, the DCF could crumble. A 20% drop in EBITDA, for instance, would cut the fair value to CA$51. But ISC's track record—10% annual EBITDA growth over five years—suggests resilience.

Investment Thesis: A Contrarian Buy

At CA$32, ISC offers a 49% upside to its DCF and a 2% yield with room for dividend growth. While risks exist, the asymmetry favors buyers: the downside is limited by cash flow, while the upside is catalyzed by sector trends and corporate actions. Hold for 12–18 months, targeting CA$50–CA$60 as the market reconciles its valuation.

For the cautious, consider a laddered approach: buy a third now, a third at CA$35, and a third at CA$38. Avoid all-in positions until catalysts materialize.

In a market starved for stable cash flows and undervalued assets, ISC checks both boxes—provided investors look past the skeptics' myopia.

Disclosure: The author holds no position in ISC.TO. Analysis is based on publicly available data as of June 19, 2025.