A window just opened to buy Real Matters, says National Bank

Real Matters (Real Matters Stock Quote, Chart, News TSX:REAL) just got pasted after its latest earnings report but the market reaction misses the bigger story, says National Bank Financial analyst Richard Tse, who says the company’s next growth driver is about to kick in.

Tse reviewed the quarterly numbers in an update to clients on Friday and stuck to his “Outperform” rating and C$40.00 target, which at press time represented a projected 12-month return of 78.9 per cent.

Real Matters, a network management services provider for the mortgage lending and insurance industries, saw its share price tumble almost 16 per cent on Friday after the company released its fiscal fourth quarter 2020 financials. REAL reported net revenue of $47.0 million, representing a 37 per cent year-over-year increase, and adjusted EBITDA of $22.2 million, a 57.5 per cent increase over a year earlier. (All figures in US dollars except where noted otherwise.)

Newly-minted CEO Brian Lang called it a strong finish to the fiscal year, saying in a press release, “Our U.S. Title business continued to outperform our other segments and for the second consecutive quarter delivered higher Net Revenue and Adjusted EBITDA than our U.S. Appraisal segment. Fourth quarter U.S. Title Net Revenue was up 69.7 per cent and Adjusted EBITDA increased 102.0 per cent year-over-year to $15.4 million.”

Lang said the US mortgage market was essentially flat over REAL’s Q4 while purchase volumes were up six per cent year-over-year and refinance volumes were down by nine per cent.

“The estimated market decline in refinance volumes was partially attributable to a reduction of addressable market volumes as a result of the increased use of waivers for refinance transactions due in part to COVID-19. We continued to rank at the top of lender appraisal scorecards in the fourth quarter and U.S. Appraisal Net Revenue increased 4.6 per cent, generating Adjusted EBITDA margins of 59.2 per cent,” Lang said.

“It’s our view that this contribution is not fully priced into the stock nor is the upcoming data strategy which we expect to hear more on next week at the Company’s Investor Day (Nov 23rd). Bottom line, if you’ve been on the sidelines, this growth story is not over – your window just opened.”

Looking at the top and bottom line numbers, REAL’s $47.0 million and $22.2 million, respectively, were beats of Tse’s estimates at $43.7 million and $19.5 million, respectively, as well as slight beats of the consensus numbers at $45.9 million and $21.5 million, respectively. Tse said REAL’s Appraisal segment saw growth of 4.6 per cent year-over-year, which was in line with his estimate, while Title and Close’s year-over-year increase of 69.7 per cent to $28.9 million was the big upside in the numbers.

Tse explained the market dip despite the better-than-expected results.

“The problem and why the stock is pulling back following big gains this year comes from a number of new moving parts with respect to the Company’s Appraisal segment, and a resetting of expectations care of an increase in refinance waivers through the quarter that are impairing industry volumes,” Tse said.

“The result is that those waivers are shaving off nine per cent in potential appraisal volume for the market. If that wasn’t enough, while Real Matters offered up a new set of long-term market share targets, it changed those targets from a segmentation perspective with Appraisals market share now split into New and Refinancing. Collectively, we believe the uncertainty behind those market and company-specific changes is triggering today’s pullback,” Tse wrote.

But instead of viewing the dip as a cause for concern, Tse says it’s an opportunity, saying that the slowing pace of acceleration in appraisals was already known and that it comes after a period of “unprecedented” levels over the summer, according to the analyst, who says the appraisals segment should still grow by 13 per cent over REAL’s fiscal 2021, driven by gains in market share.

“[That] outsized growth had already been priced into the stock and the uncertainty under the new information is causing pause,” Tse wrote. “More important in our view is Title and Close (the potentially bigger segment) which appears to be coming on stream ahead of expectations. With a market share of 2.4 per cent today and a new target to nearly triple that over the next four years, we see Title and Close growing at 45 per cent in fiscal 2021.”

“It’s our view that this contribution is not fully priced into the stock nor is the upcoming data strategy which we expect to hear more on next week at the Company’s Investor Day (Nov 23rd). Bottom line, if you’ve been on the sidelines, this growth story is not over – your window just opened,” Tse wrote.

Tse said the continued macro strength in the industry with low interest rates and higher volumes along with REAL’s continued market share gains makes for a good risk-to-reward profile for the stock. The analyst is calling for fiscal 2021 net revenue and adjusted EBITDA of $211.7 million and $90.5 million, respectively, and for fiscal 2022 net revenue and adjusted EBITDA of $247.1 million and $116.9 million, respectively.