National Bank of Canada analyst Richard Tse reviews the latest on Canadian real estate software company Altus Group Limited (Altus Group Stock Quote, Charts, News, Analysts, Financials TSX:AIF) in a November 12 report to clients. Tse maintained an “Outperform” rating and target price of $70/share for a projected return of 8.9 per cent, saying the big news is a recent tech accretive acquisition.
Founded in 2005 and headquartered in Toronto, Altus Group is an independent provider of real estate consulting services, real estate software applications and data solutions operating in Canada, the U.S., the UK and Asia Pacific. The company’s products and services are used by banks, pension funds, insurance companies, accounting firms, real estate-oriented organizations, industrial companies and investors to evaluate real property assets.
Tse’s updated analysis comes after Altus released its third quarter financial results, which Tse noted to be in line with expectations overall, as despite the numbers being better than expected they arrived after company management lowered its guidance expectations for the quarter.
Altus’s financials were headlined by revenue of $151.8 million to beat the National Bank projection of $147.3 million and the consensus expectation of $147.5 million, with adjusted EBITDA being reported at $24.4 million to also beat the expectations set by both National Bank ($21.1 million) and the consensus ($22.3 million).
“Our solid sales execution and improving operational efficiencies continue to drive strong results, enabling us to deliver better than expected financial results for the third quarter,” said Mike Gordon, Chief Executive Officer of Altus Group in the company’s November 11 press release. “We enjoyed another quarter of double-digit revenue growth, including our Altus Analytics organic constant currency growth rate rebounding to the highest level in four years. The exceptionally strong growth in Bookings demonstrates the robust market demand across our key end markets and validates the returns from the investments we made this year in our go-to-market plans and product innovation.”
Concurrently with the financial results, the company announced the acquisition of Reonomy, an AI-powered data platform for the commercial real estate industry that Tse noted would play a role in helping the company reach its stated goal of $400 million in revenue for its Altus Analytics (AA) platform by the end of 2023.
“While we obviously need to dig deeper into Reonomy, it appears what it offers is complementary to Altus’s current portfolio of technology assets which we’d characterize as focused on the accounting, management and presentation of data,” Tse said. “With that context, we think the focus going forward will likely lean towards this new asset and how it furthers the company’s push towards technology and therein an accompanying valuation rerating.”
Prior to the Reonomy announcement, the company had reported AA revenue of $65.1 million in the quarter, slightly above the National Bank estimate of $64.4 million and representing year-over-year growth of 32.4 per cent, while organic year-over-year revenue grew 14.5 per cent, with the remaining growth coming from the acquisitions of Finance Active and StratoDem Analytics.
Meanwhile, recurring revenue came in at $55.1 million for a year-over-year jump of 33.2 per cent, with the 12.8 per cent organic growth year-over-year being driven by double‐digit organic revenue growth from software, data and Appraisal Management.
“We see potentially accelerating execution in the Company’s AA segment that has the potential to re-rate this story at an accelerated rate,” Tse said.
The company’s updates have encouraged Tse to revise some of his short-term and long-term financial projections, beginning with a slight revenue reduction for the fourth quarter to $161 million from $162 million, though the overall picture for 2021 still shows Altus coming out slightly ahead at a $624 million projection compared to Tse’s initial estimate of $620 million. Looking to 2022, Tse now projects the company to reach $728 million in revenue compared to the initial projection of $701 million.
From an EBITDA standpoint, Tse projects the company to reach nine figures in 2021 with a $107.7 million projection for a margin of 17.3 per cent, with another anticipated jump to $150.9 million in 2022 for a margin of 20.7 per cent.
Looking at the valuation perspective, Tse projects a drop in the company’s EV/Sales multiple from the reported 5.2x in 2020 to a projected 4.6x in 2021, followed by another projected drop to 4x in 2022. The EV/EBITDA multiple follows a similar path, dropping from the reported 29.3x in 2020 to a projected 26.9x in 2021, then dropping off significantly to a projected 19.2x in 2022.
Tse also made changes to his EPS projections, lowering his fourth quarter projection to $0.32/share to put the overall 2021 projection at $1.79/share before a minimal projected bump in 2022 to $2.32/share from $2.31/share.
Altus Group has maintained its altitude from a pricing perspective, as the stock has produced a 39.4 per cent return for the year to date, really taking off at the end of February and sustaining its momentum since then.
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