One Small-Cap Technology Stock to Punt on- REAL

Real Matters Inc. (TSX: REAL) is a Canadian network management services provider for the mortgage lending and insurance industries. The company's platform combines proprietary technology and network management capabilities with tens of thousands of independent qualified field agents.

Key Updates:

• Strong balance sheet: In Q1FY22, the company reported a healthy debt to equity (D/E) ratio of 0.05x, which is significantly lower than the industry median of 0.71x. A lower debt to equity suggests higher financial flexibility of the firm. Moreover, the company has a lower balance sheet risk, as it’s long-term debt to total capital stood at 3.6%, which is considerably lower than the industry median of 26.2%.

• Impressive cash conversion period: In Q1FY22, the company reported its cash conversion period of only 8.4 days, which is lower than the industry median of 16.3 days. A lower cash conversion period suggest that the company is taking lower time to convert its investments to cash flows.

• Solid traction from the US Appraisal segment: In Q1FY22, the US Appraisal operation reported a 14.1% y-o-y increase in revenue at USD 79.3 million. The growth was driven by improved revenue mix, net increase in market share with existing clients combined with new client additions, partially offset by lower addressable market volumes.
  

Risks associated with the investment:

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

   Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• REAL announced its first quarter result, wherein the company posted its revenue of USD 107.7 million, versus USD 120.2 million in the previous corresponding period (pcp). This was primarily due to lower revenues generated from the U.S. Title segment (USD 16.1 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 and lower amortization costs, partially offset by a surge in the transaction costs (USD 79.0 million v/s USD 76.2 million in pcp). Income before income tax expense stood at USD 3.9 million v/s USD 10.2 million in pcp.

• Net income stood at USD 2.6 million in Q1FY22, declined from USD 7.0 million in Q1FY20, primarily due to the above-mentioned reasons.
  

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group 

Stock Recommendation:

The company reported a higher cash from operations of USD 18.7 million in Q1FY22, as compared to the USD 7.2 million in Q1FY21, supported by better working capital management. A higher cash flow indicates higher liquidity level and is a key positive. We have valued the stock using the P/CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of REAL at the last closing price CAD 5.58 on March 23, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 23, 2022). Analysis by Kalkine Group

   Technical Analysis Summary

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