Real Matters Inc T.REAL

TD Raise Target by 45%

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Real Matters Inc.

(REAL-T) C$20.14

Q2/F20 Results: Beating the Rule of 40 by a Wide Margin

Event

Real Matters reported Q2/F20 results.

Impact: POSITIVE

Low interest rates set up a multi-year opportunity. When we last revised our estimates higher in mid-March, we assumed that the lower interest rates would increase volumes for F2020, but F2021 would have a much harder y/y comp. With the pandemic driving widespread lockdowns and refi volumes significantly exceeding lender capacity, we now believe that the growth opportunity could extend into F2021. Therefore, we have moved some of our revenue assumptions from F2020 into F2021. We believe that this is positive for Real's shares since it sets the company up for a multi-year growth opportunity, rather than a short-lived bump. Management noted that its customers are hiring aggressively, with one tier-1 (T1) lender having 3,000 open positions, suggesting that the lenders are viewing this as a long-term opportunity as well.

Significant operating leverage. Management noted at its analyst day last year that the businesses could achieve 60% and 30% EBITDA margin in the Appraisal Management (AM) and Title & Closing (T&C) segments, respectively, if volumes doubled from F2018 levels. Q2/F20 results already far exceed the T&C metric, with the AM margin well within reach. As more volumes are expected to materialize from market share gains and higher lender capacity, margins can continue to expand. Management noted that each incremental dollar of net revenue in AM and T&C generates 82% and 72% of EBITDA margin, respectively.

Strong demand could shorten the sales cycle. The high number of refi applications has increased the urgency for lenders to increase their capacity. We believe that Real's faster and higher quality services resonate well with lenders in this environment and could shorten the sales cycle. Consequently, we believe that T1 lenders could sign onto the T&C platform at a faster rate than expected, which sets the company up for continued growth beyond the current refi surge.

TD Investment Conclusion

Raising our target price to C$26.00. With net revenue growth at 79% and EBITDA margin at 40.6%, Real is exceeding the rule of 40 by a very wide margin. We believe that margins can continue to expand and growth could accelerate as lending capacity increases.