Real Matters Inc.

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 Highlights:

• Positive macros: During the last decade, the US purchase and refinance mortgage activity has given consistent growth driven by record low-interest rate. Meanwhile, the company also took advantage of the industry demand by leveraging its resources like technology, network and logistics and field professional partnerships, which has resulted in consistent growth in its revenue and profitability and subsequently improved its overall market share. The company is focusing on new client’s acquisition coupled with increasing market share with its existing clients.
• Exponential growth from U.S. Title Segment: The company’s growth story was driven by a strong performance from the U.S. Appraisal Segment, which has remained the backbone of the company’s operations. Notably, the company has entered into the S. Title Segment in 2016 with the acquisition of Linear Title & Closing Ltd and has delivered exponential growth since then by leveraging the company’s existing network within the U.S. Mortgage industry. We expect the momentum to continue in the coming days, supported by a healthy performance from the U.S. Title Segment.

Source: Company Report

• Growth from the Canada region: The company reported strong growth from its Canada geography, which is a key positive. Revenue and Adjusted EBITDA were recorded at USD 39.585 million and USD 3.762 million, respectively in 9MFY21, higher than USD 21.752 million and USD 2.050 million, respectively. The above was driven by higher appraisal volumes serviced from market share gains coupled with higher market volumes across the region.

Q3FY21 Financial Highlights:

• REAL declared its third quarterly result, wherein the group reported higher revenues of USD 129.398 million, climbed from USD 118.090 million in the previous corresponding period (pcp). The growth was driven by higher income from the U.S. Appraisal and Canadian segments due to higher market volumes coupled with net market share gain along with new client additions.
• The period was marked by an increase in the operating expense (USD 27.306 million v/s USD 23.500 million in Q3FY20) coupled with an increase in transaction costs (USD 90.781 million v/s USD 74.175 million pcp).
• Adjusted EBITDA was recorded at USD 11.783 million, declined from USD 20.893 million in pcp.
• Net income declined to USD 5.262 million, from USD 6.285 million in Q3Y20.

Source: Company Report

Risks: 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.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is focusing on long-term goals, wherein the group would increase its market share by capturing total addressable market for purchase mortgage origination activity within the U.S. Appraisal segment, which remains to be the pivotal business segment for the company. Moreover, the company is also targeting to increase its Adjusted EBITDA to Free Cash Flow conversion, which would support the company’s overall performance. 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 Services Corp, Evertz Technologies Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 10.68 on September 24, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary

One-Year Technical Price Chart (as on September 24, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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