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:

• Increased traction from the US Appraisal segment: In Q1FY22, the US Appraisal operation reported a 14.1% y-o-y jump 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.

• Higher cash balance: At the end of Q1FY22, the group reported its cash and cash equivalent of USD 73.3 million, which is higher than USD 60.2 million in Q4FY21. A higher cash balance indicates improved liquidity. Additionally, during the quarter, the company reported a higher cash from operations of USD 18.7 million, as compared to USD 7.2 million in pcp, supported by improved working capital management.

• Healthy Balance-sheet: The company’s D/E ratio stood at 0.05x in Q1FY22, as compared to the industry median of 0.70x. A lower ratio suggests higher financial flexibility and is a key positive for the company. Moreover, the company long-term debt to total capital stood at 3.6% in Q1FY22, as compared to the industry median of 25.4%, which indicates lower balance sheet risk.

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, as compared to 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 16.195 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 Q1FY22 v/s USD 27.5 million in Q1FY21) coupled with lower amortization costs (USD 1.1 million in Q1FY22 v/s USD 1.2 million pcp), 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 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:

The company reported a lower cash conversion period of 8.4 days in Q1FY22, as compared to the industry median of 12.4 days. A lower conversion period suggests that the company is efficiently converting 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 peers like Information Open Text Corp, Evertz Technologies Ltd etc. Considering the aforesaid facts, we give a ‘Speculative Buy’ rating on the stock of REAL at the closing price of CAD 6.23 on February 15, 2022.

One-Year Technical Price Chart (as on February 15, 2022). Analysis by Kalkine Group 

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.