Altus Group upgraded at National Bank Financial

National Bank Financial analyst Richard Tse is feeling more bullish about the prospects for Altus Group (Altus Group Stock Quote, Chart, News, Analysts, Financials TSX:AIF) after the company’s just-released earnings report. More importantly, Tse thinks management’s shift to an acquisition-based frame of mind will power the company’s growth. In an update to clients on Wednesday, Tse raised his rating from “Sector Perform” to “Outperform” and gave the stock a new 12-month target of $60.00 (previously $52.00).

Toronto-based Altus Group, an independent provider of real estate consulting services, real estate software applications and data solutions, released its fourth quarter 2020 and full year financials on Wednesday. The company saw Q4 revenue grow marginally by 0.7 per cent year-over-year to $139.5 million, while adjusted EBITDA increased by 19.7 per cent year-over-year to $26.7 million.

For all of 2020, Altus’ consolidated revenue grew by 6.7 per cent compared to 2019 while adjusted EBITDA climbed 16.8 per cent to $98.9 million. For the fourth quarter, the company’s global restructuring program, initiated in Q2 2020, resulting in one-time restructuring costs of $3.4 million related primarily to employee severance.

Meanwhile, management said the company’s balance sheet remained healthy and strong enough to support Altus’ growth strategy. The company had a bank debt of $123.0 million at the end of the Q4 and cash and equivalents of $69.6 million.

“We’re really pleased to have achieved robust top-line and earnings growth in 2020, particularly with the backdrop of a challenging external environment for our industry,” said CEO Mike Gordon in a press release.

“At Altus Analytics, we passed a significant transition period as we fully shifted to a subscription model, finishing the year strong with healthy Over Time revenue growth, over 1,000 AE customers on our cloud platform, and a pick-up of some of our larger customers beginning their migration to the cloud platform. Our Property Tax business continued to make market share gains and drive high success rates for our clients, contributing to another record year,” Gordon said.

Looking at the numbers, Tse said the quarter came in much as expected, with the $140-million revenue coming in slightly ahead of his $138-million estimate and the consensus $134 million, while adjusted EBITDA of $26.7 million was also a bit above Tse’s $25.3-million estimate and the Street’s $22.9 million. Adjusted EPS of $0.44 per share was a notch below Tse’s estimate of $0.45 per share but above the consensus $0.39 per share.

Drilling down, Tse noted that Altus Analytics’ Q4 of $51.5 million in revenue and $5.8 million in adjusted EBITDA was below his estimates at $52.6 million and $8.9 million, respectively. Year-over-year, AA revenue was down 5.6 per cent or 5.1 per cent excluding a foreign exchange headwind.

But it was the company’s announcement, along with its Q4 earnings release, that it intended to acquire Paris-based SaaS debt and financial risk management business Finance Active for €100 million that according to Tse is emblematic of what looks like a change in strategy by Altus.

Tse wrote, “That announced acquisition was followed by comments around how adjacent acquisitions will become a cornerstone to helping Altus achieve its $400-million revenue growth target for Altus Analytics by 2023, a target which we formerly believed was unlikely under the former strategy.”

“It’s our view the shift to acquisitions is likely some acknowledgement that the former path to 2023 (through organic measures) was challenging. That said, we believe an acquisition approach will drive a positive re-rating, if only to support the Company’s long-term targets. Given that new positioning, we’re upgrading AIF back to an Outperform with a revised target of $60,” Tse wrote.

“Up until now, it has been unclear to us how the Company would grow once it completed converting all its customers to its Cloud offerings. Yes, there have been some products of potential opportunity like Voyanta but in our view, those individually were unlikely to drive enough growth (25-30 per cent) to achieve what in our view had been a lofty target for 2023,” Tse wrote.

“What’s changed this evening with acquisitions is we see the Company painting a landscape of acquisitions with products and services that can travel through its base while potentially adding new markets. In our view, that tact seems more reasonable to building AA to a point to hit its former target,” Tse said.

With that assessment, Tse is calling for 2021 revenue and adjusted EBITDA of $616.0 million and $107.1 million, respectively, and 2022 revenue and adjusted EBITDA of $675.2 million and $124.7 million, respectively. The analyst’s new $60.00 target represented at press time a projected return of 23.4 per cent.

On the proposed Finance Active acquisition, Altus said the purchase would be primarily paid in cash and drawn from the company’s credit facility, with the deal likely to close in the second quarter 2020.