Take a pass on Altus Group, says National Bank Financial

The move to cloud and subscription services is underway for Altus Group (Altus Group Stock Quote, Chart, News TSX:AIF) but the stock already has the pivot priced in, according to National Bank Financial analyst Richard Tse, who in a February 20 update to clients took a look at Altus’ latest quarterly results.

Toronto-based Altus, which provides consulting and software to the real estate industry, released its fourth quarter fiscal 2019 results last Thursday, showing consolidated revenues up 13.7 per cent year-over-year to $148.8 million and consolidated adjusted EBITDA up 55.3 per cent to $23.5 million. For the full year, revenues were up 11.2 per cent to $567.4 million and adjusted EBITDA was up 24.3 per cent to $88.1 million.

The quarter saw Altus Analytics grow 5.3 per cent year-over-year in revenue to $54.6 million, while its Property Tax segment drove the bulk of the growth with a 38.7 per cent year-over-year increase in revenue to $54.2 million.

Altus CEO Robert Courteau called 2019 a pivotal year for the company, singling out the launch of ARGUS Enterprise on the cloud.

“With ARGUS Enterprise on the cloud, our clients are gaining a lot of value by collaborating and sharing insights like never before. This rollout out gives us the opportunity to capture new clients and new users on a global basis,” said Courteau in a press release. “Our Property Tax business also had a phenomenal year and remains competitively positioned for sustained growth. Our leading position and the strength of our model contributed to market share expansion while delivering exceptional value for
clients.”   

Altus’s quarterly revenue of $149 million came in ahead of Tse’s $146-million estimate (consensus estimate was $144 million) while the $23.5-million in adjusted EBITDA was also ahead of Tse’s $18.8-million (consensus estimate was $22.6 million).

The analyst deemed both results as having a positive.

But Tse is remaining cautious about Altus, reiterating his “Sector Perform” rating while upping his target price from $40.00 to $45.00. The analyst pointed out that Altus Analytics is still early in its cloud transition, but given that the segment is to be a key driver for the company going forward, the segment’s quarterly adjusted EBITDA was a little disappointing, Tse says, arriving under his estimates and causing him to maintain his rating on the stock.

“If you’ve been following our research, you’ll know we’ve been bullish on AIF for many years, and while we continue to believe there could be a fundamental valuation re-rating if the Company successfully executes its Cloud?Subscription shift with Altus Analytics, we think the pivot to Cloud has already been priced into the stock. In our view, we see higher returning names in our coverage universe,” wrote Tse.

“In our view, while there’s definitely promise from the AA pivot to Cloud/Subscriptions, it continues to be very early in its multi-year transition and its our view that the stock is pricing that pivot to a large degree,” he said.

Tse thinks that Altus will generate fiscal 2020 revenue and EBITDA of $614.0 million and $95.3 million, respectively. His $45.00 target price represented at press time a projected 12-month return of three per cent.