Real Matters keeps “Outperform” rating at National Bank Financial

Strong quarterly results are keeping analyst Richard Tse of National Bank Financial bullish on Real Matters (Real Matters Stock Quote, Chart, News TSX:REAL).

Tse reviewed REAL’s fiscal third quarter in an update to clients Thursday in which he maintained his “Outperform” rating and C$40.00 target, which at press time represented a projected 12-month return of 37.0 per cent.

Markham, Ontario-based Real Matters is a network management services provider for the mortgage lending and insurance industries focusing on residential real estate. The company’s cloud-based platform covers appraisals, insurance inspections, title search and mortgage closings.

Real Matters released its Q3 2020 ended June 30 on Thursday, showing net revenue up 52.7 per cent year-over-year and up 22.3 per cent sequentially to $43.9 million and adjusted EBITDA of $20.9 million, which was double the $10.4 million made a year earlier.

Real management said it continues to believe that the lower interest rate environment has made for a “significant multi-year opportunity” for the company while the ability of lenders to increase their underwriting capacity during COVID-19 remains the biggest hurdle to industry growth.

“The US mortgage market continued to demonstrate its resilience in the third quarter, despite the impact of COVID-19. Historical record lows in U.S. mortgage interest rates buoyed the demand for mortgage refinancing, which more than offset the temporary decline in purchase transactions as well as the significant drop in home equity and default transactions,” said Real Matters CEO Jason Smith in a press release.

Looking at the quarter, Tse said REAL’s US Appraisals business is showing continue growth with revenue up 21.5 per cent year-over-year to $17.7 million and up 14.2 per cent quarter-over-quarter.

“With respect to Adj. EBITDA margin, increased appraisal volume drove operating leverage with a Y/Y margin expansion of 270 bps to 61.0 per cent, the highest in the Company’s history. During the quarter, Real Matters added three new lenders in its U.S. Appraisal Segment. Looking out, while some segments within Appraisals are distorting the level of refinance volumes, market share gains, new client additions and increasing appraisal volumes should continue to drive outsized growth in this segment,” Tse wrote.

Tse said REAL’s Title and Closing platform is being underappreciated by the market, where T&C is gaining momentum for the company. T&C saw revenue climb 98 per cent year-over-year to $25.3 million.

Looking ahead, Tse said there’s lots of tailwind left for REAL.

“The most recent data from MBA (Mortgage Bankers Association) point to a strong FQ4 (CQ3) with Refinancing up 30.4 per cent Y/Y off a strong comparable quarter with Purchase essentially flat on a Y/Y basis. It’s our view that as lenders gradually increase underwriting capacity, we should see an elevated level of volume flowing through REAL’s platform.,” Tse wrote.

Tse is estimating fiscal 2020 net revenue and adjusted EBITDA of $158.8 million and $69.6 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $206.0 million and $96.0 million, respectively.