Take a pass on Real Matters, says National Bank Financial

Better than expected numbers in its Q2 weren’t enough to move the needle for Richard Tse on Real Matters (Real Matters Stock Quote, Chart TSX:REAL). In a May 3 update, the National Bank Financial analyst maintained his “Sector Perform” rating and moved his target price from C$6.00 to C$6.50.

Toronto-based Real Matters, a network management services platform for the mortgage and insurance industries, announced its second quarter 2019 financials on May 2, coming in with net revenue of $20.1 million, Adjusted EBITDA of $2.8 million and Adjusted EPS of $0.01 per share. (All figures in US dollars unless noted otherwise.)

Tse was calling for a top line of $17.5 million, an Adjusted EBITDA loss of $0.7 million and an Adjusted EPS of negative $0.01 per share. The analyst notes that REAL’s strong numbers were in large part due to a solid performance from its Appraisals segments, while its Title and Closing (T&C) platform lagged.

Tse says that key takeaways from the Q2 were: improvements in net revenue margin from its Appraisals unit, which is now live with all six Tier 1 lenders; weakness in the mortgage market for its T&C unit due to weak refinance activities; and a lower interest rate environment that worked to the company’s benefit.

“Despite a solid quarter, the sensitivity of the business to the macro environment and the fact that T&C has still not hit its stride suggests caution given the stock’s turn year to date, that’s had it inching towards our former target price of C$6.00 That said, the stock is also pricing in stronger expectations and given the continued headwind in refinance activity and rate uncertainty, we think the risk-to-reward profile looks balanced,” says Tse.

The analyst rates the impact of REAL’s Q2 as a positive while judging that the stock is now reasonably priced. His updated forecast calls for 2019 net revenue of $88.2 million and EBITDA of $12.1 million and his C$6.50 target represents a projected return of nine per cent at the time of publication.