Real Matters Inc.
(REAL-T) C$28.25
Q3/F20 Preview: Favourable Backdrop
Event
Q3/F20 Results: Thursday, July 30, 2020, before markets open. Conference Call: 10:00 a.m. ET; (833) 968-2239; passcode: 3387848.Impact: NEUTRAL
We forecast total net revenue of $37.5mm, up 31% y/y. We estimate $15.1mm of EBITDA, or 40.2% EBITDA margin. We expect total gross revenue of $102.4mm, up 12% y/y. The U.S. Title & Closing (T&C) business is expected to grow by 71% y/y and U.S. Appraisal Management (AM) is expected to grow modestly grow by 3% y/y.
Market backdrop remains favourable. The market backdrop has continued to improve since last earnings. The Fed announced that it plans to keep interest rates near zero through 2022 and the unemployment rate decreased to 11.1% in June, from its 14.7% peak in April. We believe that the combination of these positives will continue to support a healthy mortgage origination market. Real saw a surge in refi volumes in March and April and given that T&C revenue on these are typically recognized 45 days later, we expect this pipeline to materialize this quarter, resulting in our 71% y/y T&C net revenue estimate. Management believes that it will take 2-3 years to process all the potential refi volumes, leaving us optimistic that the T&C business is set up for multi-year growth.
Healthy mortgage market is also being reflected in industry experts' forecasts and by tier-1 (T1) lenders. Industry experts at the Mortgage Bankers Association (MBA) and Fannie Mae have increased total mortgage origination forecasts in the NTM by ~11% since April, or by ~30% since January, on average. This suggests that the outlook for the mortgage market has improved despite the lockdowns. The T1 lenders' mortgage origination businesses have also demonstrated strength by growing 18% y/y in Q2/C20. Given that Real counts all of the T1 lenders as its customers, we believe this is a positive read-through for Real.
TD Investment Conclusion
We maintain our BUY rating and $31 target price. We remain optimistic on the company's outlook due to the uniquely favourable environment for the company. We realize our return does not align with our BUY rating, but we will revisit our rating and estimates after the earnings call this week.