Now’s a good time to be buying Real Matters, says National Bank

Real Matters, a software and services company for the mortgage lending and insurance industries, delivered its first quarter fiscal 2021 results on January 28 for the period ended December 31, 2020. The company had consolidated net revenue of $44.0 million, up year-over-year by 24.8 per cent, and adjusted EBITDA of $17.4 million, up 19.7 per cent year-over-year. (All figures in US dollars except where noted otherwise.)

“We reported solid first quarter results driven by strong year-over-year growth in our U.S. Title segment,” said CEO Brian Lang in a press release. “Consolidated Net Revenue increased 24.8 per cent to $44.0 million and consolidated Adjusted EBITDA increased 19.7 per cent to $17.4 million.”

“The US mortgage market remained strong in the first quarter due to sustained strength in refinance volumes,” he said. “We estimate that refinance market volume was up 60 per cent; by comparison, our centralized title revenues increased 93 per cent. Our US Appraisal origination revenues increased over nine per cent compared with an estimated flat addressable mortgage origination market volumes.”

Real Matters had an excellent first half to 2020 and lost some of those gains over the second half, finishing the year up 56 per cent. At its peak last July, the stock was above C$32. The stock was around C$19 before the fiscal Q1 earnings release before falling to around C$17.

In his update, Tse seemed partly perplexed by the selloff, as the quarterly results were more or less in line with estimates. The $44.0-million in revenue compared to Tse’s $43.3-million forecast and the consensus $43.8 million, while adjusted EBITDA of $17.4 million also narrowly beat Tse’s estimate at $16.8 million but was a hair below the Street’s $17.6 million. Adjusted EPS at $0.14 per share was below Tse’s and the consensus average at $0.15 per share.

Tse said the negative market reaction likely came from investor focus on Real Matters’ Appraisal segment, where revenue underwhelmed at $15.7 million compared to Tse’s estimate at $16.5 million and year-over-year growth was essentially flat in its core Origination Appraisal services.

Tse said, “In our view, given the focus in recent years on the Company’s Appraisal segment, the moderating volumes in that segment post COVID spike, combined with potentially rising rates (declining origination volumes) looking ahead, has driven the current hesitancy in REAL.”

“In our view, that line of thinking does not reflect a business that’s expected to growth net revenue by 32 per cent this year with continued growth in Appraisals, and more importantly, a scaling business in Title and Close,” Tse wrote.

“But perhaps more interesting is that despite those growth attributes, the underlying operating leverage in the Company’s business model also has a name that’s trading at 11.8x EV/EBITDA,” Tse said. “In our view, we believe a scaling Title and Close segment driven by new Tier 1 customers should catalyze a change in mindset. And, from our perspective, we believe REAL remains a compelling idea within our coverage universe.”

Two key takeaways from the quarter for Tse were, first, declining revenue in the Home Equity and Default Appraisal services part of Real Matters’ US Appraisals which offset growth in Origination revenue. Overall, Tse said Appraisals looks to be past its peak but that the company is still gaining market share, making for 9.6-per-cent year-over-year growth in the segment.

Secondly, Tse said the Q1 reinforced his view that Title and Close was getting ready to scale for REAL, where the company’s market-adjusted addressable market in US Title was up 60 per cent year-over-year. The analyst said it looks like the company is repositioning in T&C by moving away from non-core business and investing for scale, suggesting an uptick over the second half of 2021.

“Bottom line, FQ1 is the third consecutive quarter where T&C surpassed Appraisal in terms of EBITDA contribution, and in our view, that’s without a single Tier 1 at this point. No doubt, it’s pretty clear this could be the next catalyst for REAL,” Tse said.

With his reiterated “Outperform” rating, Tse has also maintained his C$40.00 target, which at the time of publication represented a projected one-year return of 131.6 per cent.

For fiscal 2021, Tse is forecasting net revenue and adjusted EBITDA of $213.6 million and $91.7 million, respectively, and fiscal 2022 net revenue and adjusted EBITDA of $251.0 million and $119.7 million, respectively.

“We think the risk-to-reward profile on REAL has become even more attractive on the recent pullback,” Tse wrote.