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:

• Elevated performance from U.S. Title Segment: The company entered into the U.S. Title business in FY16 with the acquisition of Linear Title & Closing Ltd. The group witnessed strong growth from the segment, which has contributed largely to the overall performance of the group. The enhanced performance was driven by prudent investments across the field professional panels, which has contributed to net revenue margins. Notably, the U.S. Title segment made a higher contribution of ~31% to the company’s total income in Q2FY21, v/s ~28% in Q2FY20.

Source: Company Report

• Improved Macro Dynamics: Over the last decade, the US purchase and refinance mortgage activity has remained elevated, which delivered a growth of a mid to high single-digit in terms of volumes since 2011. Record low-interest rate is the prime driver of the above. In the recent past company also delivered stupendous growth by leveraging its resources like technology, network and logistics and field professional partnerships, which has resulted in improved market share, which is a key positive.

Source: Company Report

Q2FY21 Financial Highlights:

• REAL declared its quarterly result, wherein the group reported revenues of USD 128.828 million compared to 109.643 million. The increase was driven by strong performance led by the U.S. Title segment (USD 40.050 million v/s USD 30.808 million in Q2FY20.) combined with a decent growth from the U.S. Appraisal segment (USD 76.3 million vs USD 71.3 million).
• Adjusted EBITDA stood at USD 19.013 million, as compared to USD 14.607 million in pcp. The above increase was driven by higher volumes and margin expansion from the company’s U.S. Title segment.
• The quarter witnessed a surge in the operating expense (USD 28.206 million v/s USD 21.977 million in Q2FY20) combined with higher in transaction costs (USD 82.170 million v/s USD 73.703 million pcp).
• Net income stood lower at USD 11.674 million, as compared to USD 18.652 million in Q2Y20. The decline was primarily due to a net foreign exchange loss of USD 1.515 million v/s, a gain of USD 12.419 million in Q2FY20.

Q2FY21 Financial Highlights (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 Earnings

Stock Recommendation:

The company reported an improved free cash flow of USD 14.929 million in Q1FY21, higher than USD 13.960 million in the previous corresponding period (pcp). Due to the falling interest rate scenario, the management highlighted that the default rate would likely to remain low, which is a key positive for the company’s overall performance. Moreover, the mortgage purchase activity would return to normalized levels, with the gradual reopening of the overall economy. Based on technical analysis, the stock has support at CAD 15.0 level. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Open Text Corp, Descartes Systems Group Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing market price of CAD 17.84 on July 2, 2021.

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

One-Year Technical Price Chart (as on July 2, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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

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