Real Matters Inc. (TSX: REAL) is a Canadian network management services provider for the mortgage lending and insurance industries. The company operates mainly into U.S. Appraisal, U.S. Title, and Canada segments, where major revenue comes from the U.S. Appraisal segment.

Key Updates:

• Gaining traction from the US Appraisal segment: In Q1 2022, the company's largest revenue contributor division, "US Appraisal Segment," recorded a 14.1% year-over-year increase in revenue to USD 79.3 million, up from USD 69.6 million in pcp. Improved revenue mix, net rise in market share with current customers, and new client additions drove the growth, which was slightly offset by decreased addressable market volumes.
• Growing cash from operations: The company's reported cash from operations grew by USD 11.4 million to USD 18.7 million in Q1 2022, compared to USD 7.2 million in the prior quarter, thanks to better working capital management.

Source: Company Filing

• Improved liquidity: The group reported cash and cash equivalents of USD 73.3 million at the end of Q1 2022, up from USD 60.2 million in Q4FY21. Improved liquidity is indicated by a bigger cash balance. Furthermore, the company's current ratio is greater than the industry median in the same reporting period, demonstrating that the group's short-term commitments are expanding at a slower rate than its resources to fulfill them, which is a good sign.
• Robust Balance-sheet: In Q1 2022, the company's Debt/Equity ratio was 0.05x, compared to the industry median of 0.67x. A smaller ratio indicates greater financial flexibility, which is a significant plus for the organization. Furthermore, the company's long-term debt to total capital was 3.6% in Q1 2022, compared to 23.7% for the industry, indicating lesser balance sheet risk.
  

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 6.3x compared to the sector (Technology) median of 10.1x. While on NTM Price to Cash Flow multiple the stock is trading at 8.9x compared to 15.7x. This implies that the shares are trading at a deep discount against the sector. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with the investment:

The operations of the company get impacted by the current mortgage market situation, which is cyclical and is impacted by several factors, such as broader economic conditions, changes to interest rates, changing regulations, etc.

Financial overview of Q1 2022 (in thousands of U.S. dollars)

Source: Company Filing 

• The company announced its first-quarter result, wherein it posted a revenue of USD 107.7 million compared to USD 120.2 million in the previous corresponding period. The decline was primarily due to lower revenues generated from the U.S. Title segment (USD 16.195 million, down 59.4% on y-o-y basis) which was partially offset by a growth in revenue from the U.S. Appraisal segment.
• The quarter was marked by lower operating expense (USD 23.1 million in Q1 2022 v/s USD 27.5 million in Q1 2021), partially offset by a surge in the transaction costs (USD 79.0 million v/s USD 76.2 million in pcp).
• Net income stood at USD 2.6 million in Q1 2022, declining from USD 7.0 million in pcp, primarily due to the above-mentioned reasons.
  

 Valuation Methodology (Illustrative): Price to CF-based

Analysis by Kalkine Group

Stock Recommendation:

In the first quarter of 2022, the company recorded consolidated sales of USD 107.7 million, with revenue increase in the U.S. Appraisal and Canadian sectors offsetting a dip in the U.S. Title segment. The group's appraisal operations performed well in the reporting period, and the company is happy with its competitive position in the United States Title market. In addition, it made significant progress on the scorecards in the United States this quarter, establishing the groundwork for ongoing market share expansion and enhancing its value offer with new clients, which is a positive.

On the financial front, the company is increasing its liquidity and maintaining a strong balance sheet, both of which are significant advantages. It also enhanced its cash from operations in Q1 2022 to USD 18.7 million. Last but not least, the company is selling at a significant discount to its intrinsic value based on a variety of valuation factors. Hence considering the aforesaid facts, we give a ‘Speculative Buy’ rating on the stock at the closing price of CAD 5.32 on March 8, 2022.

One-Year Technical Price Chart (as on March 8, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary:

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