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

Key Updates:

• 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 aided by improved revenue mix, net increase in market share with existing clients coupled with the addition of new client, partially offset by a lower addressable market volume.

• Result Announcement: The company reported that it would disclose its second quarter FY22 result on April 28, 2022.

• Prudent Capital Management: 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 group 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%.

• Client Acquisition within the US Title Segment: Within the US Title segment, the company mainly caters to the Tier 3 and 4 mortgage lenders across the North America. Notably, in the recent past, the company targeted to increase its market share and focused on acquiring Tier 1, Tier 2 and Tier 3 clients. During FY21, the company added several top 100 lenders, which includes the acquisition of its first Tier 1 client for title services, which is encouraging. We expect the momentum to continue in FY22 and would result in improved performance metrics.

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 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 Q1FY21, primarily due to the above-mentioned reasons.

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group 

Stock Recommendation:

In Q1FY22, the company reported its cash conversion period of only 8.4 days, which is significantly 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. We have valued the stock using the P/CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry peers like Information Services Corp, Evertz Technologies Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of REAL at the last closing price CAD 5.10 on April 06, 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 April 06, 2022). Analysis by Kalkine Group

 Technical Analysis Summary

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