Star Equity Holdings Inc (US:STRR) rocketed 28% higher in trading on Friday after announcing that it had completed the sale of its imaging business, Digirad Health Inc.

Even after the rally on Friday, the consideration for the sale is more than three times STRR’s market capitalization. Ahead of Monday’s regular session, the shares are pulling back about 3% at last look.

That has some investors wondering if the shares have further to rally?

Health Phase-out

Star Equity is a diversified investment holding company that operates three segments of construction, health and investments. The health segment will be removed as part of the sale with the equity interest in buyer TTG Imaging Solutions likely rolled into the investment segment.

The business was sold to privately held TTG for a total value of $40 million. That’s made up of $27 million in cash, a $7 million promissory note, and $6 million of rollover common equity interest in TTG. The CEO of Star Equity, Rick Coleman, will serve on the board of directors of TTG.

The sale of Digirad appears to be a good move for Star Equity shareholders. While the cash component only equates to two thirds of the deal at $27 million, it boosts cash liquidity toward ~$30 million.

Stronger Balance Sheet

For FY22 STRR generated a net loss of $7.17 million so the liquidity was required to keep operations financed. Sales in the healthcare division fell 6.1% over the year to $55 million, lagging the construction segment which grew sales by 19.1%.

TTG CEO Matt Mastarone expects the tie-up to create a stronger market presence for the combined business, resulting in benefits to employees and customers. The acquisition is expected to cement TTG’s position as a full-service, national leader in imaging solutions.

Star Equity expects that the sale of Digirad will create substantial immediate value for shareholders while providing significant upside potential as TTG executes its growth strategy.

The sale will strengthen Star Equity’s balance sheet and leave it well-positioned to execute its growth strategy, which involves generating organic growth in the Construction division, completing acquisitions, and expanding activity in the Investments division.

As part of its holding company strategy, Star Equity will continue to evaluate its operating businesses and investment portfolio and pursue dispositions, joint ventures, and other M&A opportunities. The company plans to update shareholders on its progress more regularly on developments which is a positive as it adds further catalysts for the share price.

Cut Cash Burn

What will management need to do next?

A chart from Fintel’s financial metrics and ratios page for STRR shows how cash generated from operating activities turned negative in the final quarter of 2022.

Management needs to reduce cash burn from operations or find an acquisition that will add positive free cash flow to the group.

Would a takeover be possible?

STRR may now be looking like a more attractive takeover target to possible acquirers. With a bolstered cash balance, a segment and growing operational metrics, the stock looks like a steal at $13 million.

This could come from one of the 27 institutional investors on the STRR register that own 730,000 shares. The largest shareholders include Wells Fargo, Bridgeway Capital, Ultra-Small Company Market Fund, Geode Capital Fidelity and Two Sigma.

In the meantime, Star Equity is due to release first-quarter fiscal 2023 results on May 15. Data compiled by Fintel shows the average of four analysts is for earnings per share of 4 cents compared to a loss of 15 cents in the comparable year-ago period.

As of May 1, two analysts rated STRR stock as a ‘strong buy’ while five viewed it as a ‘buy’. One analyst recommended clients ‘hold’ on the shares.

This article originally appeared on Fintel

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