Real Matters Inc.

Strong volume growth, ample liquidity to drive growth: Real Matters Inc. (TSX: REAL) provides residential real estate appraisals to the mortgage market. Moreover, it is a leading independent provider of title and mortgage closing services. Through its application software platform it offers property valuation, risk management, and data analytic services. The company’s clients include the top 100 mortgage lenders in the US. Besides, the company also serves some of the largest insurance companies in the North America.

On April 15, Real Matters provided an update on mortgage market data. The company stated that that the mortgage applications have increased by 7.3% week-over-week. Meanwhile, it increased 59.1% on a year-over-year basis. The refinance applications have increased by 10.1% week-over-week and 192.0% year-over-year. However, purchase applications fell 0.9% week-over-week, and 35.1% year-over-year.

Q1FY20 performance: Real Matters posted stellar first quarter result, thanks to the robust U.S. mortgage market led by strong refinance activity. Moreover, market share gains with some of the largest clients further drove top line growth. Real Matters posted revenues of US$ 103.8 million, up 71.4% y-o-y. The strong growth in revenues reflects stellar growth in the U.S. Appraisal segment. New client additions, market share gains, and higher market volumes drove the segments revenues. Meanwhile, the U.S. Title segment revenues also registered impressive growth led by increase in market volumes for refinance activity. The company’s revenues in the Canadian segment also witnessed healthy growth on the back of higher volumes and market share gains. Total transaction costs jumped 64.4% to US$ 68.5 million, which is directly attributable to the higher transactions. Adjusted EBITDA came in at US$ 14.5 million, up from US$ 1.7 million in the prior-year period. Moreover, adjusted EBITDA margin expanded significantly to 41.2%, up from 9.1% in the first quarter of FY19. The surge in EBITDA and EBITDA margin came on the back of stellar revenue growth. The company posted adjusted net income of US$ 9.2 million, up from US$ 1.8 million in the comparable prior-year period.  Real Matters ended the first quarter with cash & cash equivalents of US$ 80.87 million, up from US$ 71.68 million in Q1FY19.

Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):P/E based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock recommendation: Real Matters stock has been resilient to the recent stock market downturn. REAL stock has outperformed the broader markets by a wide margin and is up about 34% so far this year. Though COVID-19 outbreak is hurting the purchase applications; mortgage and refinance volumes have spiked, which is likely to drive strong revenues for the company. The company recently announced that its appraisal and title volumes remain strong, higher than any week in 2019. Meanwhile, the company has a strong balance sheet and ample liquidity. At the end of the first quarter, Real Matters had cash & cash equivalents of about US$ 80 million. Also, the company has a credit facility of $40 million. Moreover, Real Matters has negligible debt in its balance sheet. REAL stock trades at a forward P/E multiple of 26x, which we believe to expand further. Overall, we believe Real Matters remains well-positioned to continue to benefit from surge in volumes. Moreover, addition of new clients and market share gains are likely to drive its sales and earnings in the coming quarters. We have valued the stock using the P/E based relative valuation method with a target multiple of 28.0x. We arrived at a target price which implies a potential upside in low double-digits (% terms). Hence, we recommend a “Buy” on the REAL stock at the closing market price of CAD 16.60 as on April 20, 2020.

REAL Daily Price Chart (Source: Thomson Reuters)

Evertz Technologies Limited

International expansion, cost savings to support business: Evertz Technologies Limited (TSX:ET) designs, produces and distributes video and audio infrastructure solutions for the television, telecommunications, and media segments. The company stated that it would disclose its Q4FY20 results as on June 30, 2020.

The company paid a quarterly dividend of CAD 0.18 per share, stood at par with the previous corresponding period. Meanwhile, the company reported a buyback of capital stock worth CAD 3.6 million during the quarter.

Q3FY20 Financial Highlights: For the period ended January 31, 2020, ET posted total revenue of CAD 121.23 million, as compared to the CAD 120.94 million in the previous corresponding period. The y-o-y increase reflects 31% growth from the international segment, which was partly offset by lower income from the United States/Canada region. Operating income stood at CAD 26.21 million, as compared to CAD28.17 million in Q3FY19. The decrease was primarily due to an increase in selling, administrative and general expense, higher research and development costs, partly offset by a gain on foreign exchange. The company reported a lower net income of CAD 19.40 million, as compared to CAD 21.93 million in the previous corresponding period, primarily due to lower operating income, which was partly offset by lower income tax.

Q3FY20 Income Statement highlights (Source: Company Reports)

Valuation Methodology (Illustrative): P/E based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of ET soared ~30% during the last one month and currently trading at a market capitalization of ~CAD 1.107 billion. The stock offers a lucrative annualized dividend yield of ~5.042%, which is impressive considering the current interest rate scenario. ET generates revenue by providing assistance to content creators, broadcasters, specialty channels and television service providers through its offerings like software, equipment, and technology. Majority of the income is derived from the North American market while the company is targeting to enhance its market presence across the International geographies. We believe the increase in adoption of Evertz' IP-based Software-Defined Video Networking solutions, along with its cloud-based virtualized solutions, and the immersive 4K Ultra-HD solutions is likely to generate healthy earnings for the company. The company is focusing on lowering its input costs through efficient signal routing, distribution, monitoring and efficient utilization of content and automation. We have valued the stock using the price to earnings based relative valuation methodology and arrived at a target price offering a lower-double digit upward potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 14.28 as on April 20, 2020.

ET Daily Price Chart (Source: Thomson Reuters)

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