I Will Leverage New Clients And Market Share Gains For Future Success In US Title Services

Key Takeaways

• Real Matters is gaining market share and launching new clients, driving growth in U.S. Appraisal and Title services.
  
• Strong financial positioning and key client acquisitions are enhancing revenue, margins, and earnings in Canada and the U.S. Title market.
  
• Rising operating expenses and dependence on mortgage rates pose significant risks to Real Matters' profitability and revenue growth in its U.S. segments.

Catalysts

A technology and network management company, provides appraisal and title services in Canada and the United States.

• Real Matters launched several new clients and experienced market share increases with existing top customers, positioning them for future revenue growth as they capture more business in U.S. Appraisal and Title services.
  
• The company is at an inflection point in the U.S. Title market with a substantial increase in refinance origination volumes and the expected launch of new active franchise title clients, which should drive revenue and net margin growth due to higher transaction volumes.
  
• The Canadian segment showed a significant year-over-year revenue increase and is expected to maintain high net revenue margins, indicating that the company can convert much of this revenue into earnings.
  
• With a strong balance sheet, no debt, and growing potential refinance candidate pools, Real Matters is well-positioned to leverage changes in interest rates, potentially increasing transaction volumes, revenue, and earnings.
  
• The recent addition of a Tier 1 client and other top customers in the U.S. Title segment signifies larger future revenue streams and potential margin enhancements due to operating leverage, thus positively impacting future earnings.

Real Matters Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Real Matters's revenue will grow by 19.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 6.7% in 3 years time.
• Analysts expect earnings to reach $20.4 million (and earnings per share of $0.26) by about March 2028, up from $5.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2028 earnings, down from 49.8x today. This future PE is greater than the current PE for the CA Real Estate industry at 9.2x.
• Analysts expect the number of shares outstanding to grow by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.28%, as per the Simply Wall St company report.

Real Matters Future Earnings Per Share Growth

Risks

• Increasing operating expenses, such as nonrecurring claim expenditures, higher legal fees, salary increases, and benefit costs, are affecting adjusted EBITDA margins, potentially impacting net margins negatively.
  
• The company's U.S. Appraisal segment has witnessed a decrease in net revenue margins by 140 basis points due to the distribution of transaction volumes related to geographies, clients, and product mix, which could impact overall earnings.
  
• The U.S. election and an increase in mortgage rates have led to relatively flat purchase application data, which could limit revenue growth opportunities if such economic conditions persist.
  
• The substantial reliance on changes in mortgage interest rates for refinance origination volumes indicates vulnerability to rate increases, which could adversely affect both revenue and net income.
  
• Higher operating expenses due to the addition of sales personnel and other costs in the U.S. Title segment have led to an adjusted EBITDA loss, persisting pressure on the profitability of that business segment.

Valuation

• The analysts have a consensus price target of CA$8.18 for Real Matters based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$12.0, and the most bearish reporting a price target of just CA$6.51.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $302.1 million, earnings will come to $20.4 million, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of CA$5.68, the analyst price target of CA$8.18 is 30.6% higher.
• 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.