Strong Balance Sheet And New Clients Will Drive Future Success In US Appraisal And Title Segments

Key Takeaways

• Strong growth in U.S. Appraisal and Title segments, client onboarding, and market share gains drive revenue and improve margins.
  
• Balance sheet strength and operational leverage position Real Matters for profitability, with potential boosts in EBITDA margins from excess capacity absorption.
  
• Rising operating expenses and sensitivity to interest rate changes threaten Real Matters' future profitability and introduce uncertainty in revenue projections.

Catalysts

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

• Real Matters is experiencing strong growth in U.S. Appraisal and Title segments, with significant net market share gains and new client launches. These operational advancements are expected to drive substantial revenue growth moving forward.
  
• The company is onboarding several new major clients, including a Tier 1 U.S. lender, which is expected to significantly increase transaction volumes, ultimately leading to improved net margins and a substantial increase in revenue generation.
  
• Pent-up demand is building in the market, with a growing pool of refinance candidates. This potential future refinancing activity, driven by a large number of outstanding mortgages with high interest rates, is expected to enhance revenue and increase earnings when the interest rate environment becomes favorable.
  
• Real Matters is leveraging its strong balance sheet and lack of debt to strategically manage costs and maintain the flexibility needed for capturing additional market share, which could result in higher net margins and improved profitability.
  
• The company is well-positioned for operational leverage, with excess capacity in key segments like U.S. Title ready to absorb new business without substantial new investment, thus providing a potential boost to its adjusted EBITDA margins as volumes increase.

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 February 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 25.9x on those 2028 earnings, down from 55.2x today. This future PE is greater than the current PE for the CA Real Estate industry at 11.6x.
• 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 6.81%, as per the Simply Wall St company report.

Real Matters Future Earnings Per Share Growth

Risks

• The increase in operating expenses, due to nonrecurring claim expenditures, higher legal fees, salary increases, and benefits costs, has negatively impacted adjusted EBITDA margins, which could affect future profitability.
  
• The company's U.S. Appraisal segment experienced a decrease in net revenue margins by 140 basis points due to the distribution of transaction volumes related to geographies, clients, and product mix, potentially affecting overall earnings.
  
• While the company saw growth in refinance origination volumes, this was partly attributed to a brief decrease in mortgage interest rates. The sensitivity to rate changes suggests that future revenue growth might be vulnerable to interest rate fluctuations.
  
• Despite growth in several segments, the company posted an adjusted EBITDA loss due to increased operating expenses, raising concerns about cost management and its impact on net margins.
  
• The company faces potential challenges from economic and political changes that could influence mortgage rates and customer activities, introducing uncertainty in revenue forecasts.

Valuation

• The analysts have a consensus price target of CA$8.165 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$6.46.
  
• 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 25.9x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of CA$6.3, the analyst price target of CA$8.17 is 22.8% 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.