Real Matters Inc (TSX: REAL) is a Canadian network management services provider for the mortgage lending and insurance industries. The Company helps its clients make intelligent decisions about real estate by leveraging technology to deliver better quality, transparency and efficiency.

Key highlights

• Favorable market conditions: Recently, the company reported improved performance from its U.S. Appraisal segment aided by higher market volumes, net market share gains, and new client additions. Notably, in 9MFY21, the group reported a 9.7% y-o-y growth from its addressable mortgage origination market while its origination revenue was up by 14.2% on y-o-y basis.

• Gaining market share: The company continued to grow its market share, launched new lenders and got benefited from a more robust market on both sides of the border in the third quarter. Its U.S. Appraisal origination revenues were up 20.6% compared with an estimated 17.1% increase in the addressable market.

• Strong growth from U.S. Title Segment: The U.S. Appraisal Segment has contributed handsomely to the company’s growth in the recent past. 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.

• Canada market reported promising results: The group reported encouraging performance from its Canada segment, wherein revenue soared 82% on y-o-y basis to USD 39.585 million in 9MFY21, supported by due to higher appraisal volumes serviced from market share gains coupled with higher market volumes. Adjusted EBITDA stood at USD 3.762 million in 9MFY21, significantly higher than USD 2.050 million in pcp.
  

Financial overview of Q3 2021 (in thousands of U.S. dollars)

Source: Company

• In Q3 2021, the company posted revenue of USD 129.3 million against USD 118.0 million in the previous corresponding period. The rise in revenues was mainly due to higher revenues from U.S. Appraisal segment due to higher market volumes, net market share gains and new client additions.
• Transaction cost as % to revenue increased to 70.15% at USD 90.7 million in Q3 2021 compared to 62.80% at USD 74.1 million in the previous corresponding period. The cost increased mainly due to higher volumes serviced in U.S. Appraisal and Canadian segments.
• On the back higher transaction cost and higher operating expenses, the company clocked an income before income tax of USD 7.2 million compared to USD 10.4 million in pcp.
• The company’s net income in the reported period stood at USD 5.2 million against USD 6.2 million, partially benefitted by lower income tax expense.

Risks associated with investment

Residential mortgage volume in North America is a crucial driver for the Company's financial performance, and cyclical trends and seasonality influence this, which could impact the Company’s operations and cash flows.

Valuation Methodology Illustrative: EV to Sales

Stock recommendation

In Q3 2021, the company’s consolidated revenues increased 9.6% to USD129.4 million. It posted record-breaking revenues and Net Revenue under the U.S. Appraisal and Canadian segments, which was offset in part by a decline in our U.S. Title segment which dragged the company’s performance on a lower side. Furthermore, it registered higher market volumes and new client additions in its U.S. Appraisal segment, which is praiseworthy. Additionally, the group aim to convert 70-75% of Adjusted EBITDA into free cash flows between fiscal 2021 through the end of fiscal 2025, which is a key positive. Therefore, based on the above rationale and valuation, we recommend "Buy" rating at the closing price of CAD 9.37 on November 16, 2021. We have considered Open Text Corp, Altus Group Ltd, Information Services Corp, etc., as the peer group for the comparison.

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

Technical Summary Analysis

One-Year Technical Price Chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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