Emphasizing Recurring Revenue Will Expand Adoption Of Cloud Solutions

Key Takeaways

• Altus Group's focus on recurring revenue and strategic pricing aims to drive consistent growth and broader user adoption in their Analytics segment.
  
• Strategic reinvestment of proceeds from the property tax business sale aims to enhance long-term growth through acquisitions and expansions.
  
• Altus Group's shift from nonrecurring revenue and competitive pricing pressures could challenge revenue and earnings, amid restructuring costs and global economic uncertainties.

Catalysts

Provides asset and funds intelligence solutions for commercial real estate (CRE).

• Altus Group is focusing on transforming their Analytics segment with a strategic emphasis on recurring revenue, which accounted for 94% of analytics revenues in Q4. This focus is expected to drive consistent revenue growth, particularly with new product launches and an asset-based pricing strategy that encourages broader user adoption.
  
• With the sale of their property tax business, Altus Group received approximately CA$600 million in net proceeds. This significant liquidity provides an opportunity for strategic reinvestment that can enhance long-term earnings, indicating potential growth in earnings from strategic acquisitions and organic expansions.
  
• Altus Group's medium-term target is to achieve a 35% margin for the Analytics segment by fiscal 2026, supported by ongoing margin expansion efforts, increased adoption of their cloud solutions, and an emphasis on operational efficiencies. This points to an improvement in net margins as the cost structure is optimized.
  
• Recurring new bookings improved by 10.9%, and improvements in adjusted EBITDA with a strong focus on operational efficiencies suggest that they aim for strong free cash flow conversion, targeting 65% to 70% of adjusted EBITDA by fiscal 2026, highlighting a potential positive impact on free cash flow and earnings conversion.
  
• The recovery phase in their key markets, with signs of improving cash flows and more stable valuations, positions Altus Group to benefit from potential upward trends in transaction volumes, likely driving revenue growth as market conditions improve.

Altus Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Altus Group's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.2% today to 13.7% in 3 years time.
• Analysts expect earnings to reach CA$88.1 million (and earnings per share of CA$2.0) by about February 2028, up from CA$-793.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.5x on those 2028 earnings, up from -3178.8x today. This future PE is greater than the current PE for the CA Real Estate industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Altus Group Future Earnings Per Share Growth

Risks

• The company faces potential headwinds from its noncore business operations, as Altus Group is moving away from nonrecurring revenue, which could lead to lower overall revenue performance if not offset by growth in core areas.
  
• There are pricing pressures and challenges in the Data Solutions segment, driven by competitors' strategies and broader market pricing, which may impact revenue and net margins.
  
• The restructuring costs associated with rightsizing the business after the property tax divestiture could impact earnings in the short term, as they continue into 2025.
  
• Uncertainty in global macroeconomic conditions, including interest rate volatility and geopolitical factors, may affect transaction volumes and the general cost of capital for clients, impacting revenues and earnings.
  
• Execution risks tied to the transition to asset-based pricing and the adoption of new products such as ARGUS Intelligence may lead to fluctuations in revenue growth if client uptake is slower than anticipated.

Valuation

• The analysts have a consensus price target of CA$60.143 for Altus Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$642.5 million, earnings will come to CA$88.1 million, and it would be trading on a PE ratio of 30.5x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of CA$55.0, the analyst price target of CA$60.14 is 8.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.