Real Matters Inc

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 FY21, the group reported a 7.4% y-o-y growth from its addressable mortgage origination market while its origination revenue was up by 18.7% on y-o-y basis.

• 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.

• The management set performance goals for 2025: On the back of onboarding new customers and increasing market share with its existing clients, the administration raised the bar by setting the new targets through the end of fiscal 2025. Here they expect to achieve a net revenue margin between 26-28% and an Adjusted EBITDA margin between 65-70% for the U.S Appraisal segment, while for the U.S Title segment, the net revenue margin would be in a range of 60-65% along Adjusted EBITDA margin between 50-55%. Furthermore, 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.
  

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

Source: Company Filing

• In FY 2021, the company posted revenue of USD 504.1 million against USD 455.9 million in the previous corresponding period. The rise in revenues was mainly due to higher revenues from U.S. Appraisal and Canadian segments due to higher market volumes, net market share gains and new client additions.
• Transaction cost as % to revenue increased to 67.4% at USD 339.8 million in FY 2021 compared to 64.4% at USD 293.8 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 46.1 million compared to USD 61.4 million in pcp.
• The company’s net income in the reported period declined slightly to USD 33 million against USD 42.7 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

The company closed out fiscal 2021 with record results in its U.S. Appraisal business. The group also marked a milestone year for U.S. Title with the launch of the first Tier 1 and the rollout of a new Tier 2 lender, achieving double-digit market share in the retail channel with both of these title clients, based on the strong performance. We believe, the company is executing well on its plan with a long-term view of the business and is confident in its ability to achieve the fiscal 2025 objectives, which includes doubling its U.S. Appraisal market share and tripling the U.S. Title market share from fiscal 2020 levels. 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 "Speculative Buy" rating at the current market price of CAD 8.00 at 10:15 am Toronto time on December 09, 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 December 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

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