The Post Covid Real Estate/Tech Playbook - 4 Names to Buy...I really want to hit on this and present a couple of ideas here because this is one of my favourite secular themes to play because there has been an acceleration of trends as a result of COVID and the impact has not been reflected in many of these stocks sitting near 52-week lows.
All the while the US Homebuilder/Products ETF at a sector level is 100% off the March lows and within spitting distance of an all-time high.
Whether you look at housing price index at all time highs, mortgage rates at all-time lows, record household formation of millennials moving to the burbs, massive shortage in new home starts especially single family or housing showings back to growth YoY just 3 months after we entered a global pandemic.
This in such stark contrast to the work from home/new found COVID plays that are going to save the world that are ripping higher where I think some of these trends in real estate and leveraging tech in this process have just as large multiyear tailwinds and durable growth ahead of them for years to come but you wouldn’t know especially if you look down market cap at some of these.
At the Sector Level
Leaning on the tech platforms that support these end markets in real estate is the way I want to play this trend given the scalability and operating leverage that are inherent in these models as the industry has to lean into the technological shifts in the industry. The three companies I am going to highlight have a blended organic growth rate >20%, a blended gross margin profile of >70% all the while being cashflow positive.
Now let’s look at where the sector is on a valuation basis;
Canadian Enterprise Software – 13.5x LTM Sales & 26x EBITDA and 11.0x NTM Sales & 24x EBITDA w a mid teen growth rate
Data and Analytics – 9.5x LTM Sales & 34x EBITDA and 8.9x NTM Sales & 28x EBITDA w a mid single digit growth rate
For a Blended Rate – 11.5x LTM Sales & 30x EBITDA and 10.0x NTM Sales & 26x EBITDA
My TSX Real Estate Tech Trio - 1.25x Sales & 8x EBITDA
So now, lets look at 3 actionable names that can act as real estate derivative SaaS names and one hard asset play.
Urbanimmersive Inc. – UI.V 0.045/share (0.04 – 0.11/share 52 week range)
I don’t think there has been a single element of the real estate process that has seen more a shift and it’s starting to show up in the numbers.
Urbanimmersive digitizes the home tour process with 3D virtual tours for real estate properties and a business solution for real estate photographers. If this business model was ever going to work, well you better bet now is the time.
These platform businesses it’s all about activity and usage, it is the lifeblood of the business. The usage increase on the platform is already starting to show up in the high frequency data, in 18 days in June they have already done more activity on their platform then the entire month of April and is on pace to be up 13 – 18% YoY and on pace for >20% growth on a MoM from May to June. So, within three months of COVID they are already on pace for their best month in company history. Take that in for a second.
On the Numbers;
Levered turnarounds are not for everyone, but you have massive torque to the upside from just more of the value being transferred from the debt to the equity of the business as they take the cashflow to pay down the debt.
On a NTM basis, I see them generating $3.65M in Revenue w $1.2M in EBITDA for a valuation of 1.0x Sales and 3x EBITDA.
Granted there is some debt here, but the FCF conversion of EBITDA is so high that they have a real shot of paying down the debt without diluting shareholders, especially as they have recently got a good chunk of it termed out with no sizable debt cliff ahead other than the debentures which is held in a large part by the Caisse de Depot… I think the Quebec government pushes for strategic alternatives for them to sell the business given how darn cheap the thing is but I am just speculating.
What it’s Worth;
On the blended multiple above for the sector 10x EV/Sales or 30x EV/EBITDA it would be worth 0.35/share plus or minus a couple cents.
Clearly its not worth that much, but it is just a great exercise to how blown out some of these small cap names are to their larger peers.
My north star is always 5.0x EV/Gross Profit for these SaaS names, that would equate to a valuation of 0.15/share or 230% upside.
In summary, you are getting the strongest tailwind of change in real estate market and its already starting to show up in the monthly data. In addition to the recent traction you are starting to see with their recent partnership announcements on the business development side. They have focused on the residential market but they get any traction on the commercial side this thing could fly.
RenoWorks Software Inc. – RW.V 0.25/share (0.21 -41/share 52 week range)
The remodel trade, without a question the as people spend more and more time at home they see the flaws and want to improve their existing home, it helps when the value of their home is ever increasing and they offer a solution that can be done without face to face interaction and socially distanced.
RenoWorks develops home imaging and web design for new home and remodel construction, and if you have walked through a Home Depot and Lowes clearly their business is booming.
The key with new technology like this is to get consumer behavior to change and stimulate demand and be able to pull through demand from not only the contractor side but the end consumer and present a superior value proposition to how they have done it in the past. Social distancing just accelerates this.
On the Numbers;
The key driver here is the Design Service side of the business, 2019 was a year when a lot of things went wrong and they were still able to grow revenues double digits YoY and Design service revenue 34% YoY.
Its all about Design Service Revenue becoming a larger portion of total revenue, it has been accelerating that last 3Qs with and in the recent Q1 going into this it was growing 50% YoY. Combine this with in the most recent public interview the CEO has stated that inquiries have been up 100% YoY in the recent months.
With 70% Gross margins and the cost structure expanded in 2019 to prepare for this growth that was supposed to come last year with the data service agreement that got pushed into FY20 almost all of this gross profit dollar growth will flow down the income statement in FY20 and beyond.
On a NTM basis, I see them generating $5.2M in Revenue w $0.55M in EBITDA for a valuation of 1.75x Sales and 16x EBITDA.
With a clean balance sheet and so much imbedded operating leverage in the model they have the ability to grow this this thing without incremental capital investment for years. There are significant network effects here bringing on large contractors and more and more players along the supply chain and you can already see the traction they are starting to get with the latest PR with James Hardie coming onto the platform. They are clearly going after a space where people see value and area for tech to disrupt an industry, Hover the US player in the same space has raised $100M of VC capital. I think RenoWorks gets taken out as they get scale.
What it’s Worth;
On the blended multiple above for the sector 10x EV/Sales or 30x EV/EBITDA it would be worth 1.40/share or 0.45/share plus or minus a couple cents.
Clearly it’s not worth that much, but it is just a great exercise to how blown out some of these small cap names are to their larger peers.
My north star is always 5.0x EV/Gross Profit for these SaaS names, that would equate to a valuation of 0.50/share or 100% upside.
In summary, access to the remodel trade that was accelerating pre-covid and post covid that trend has seen a further acceleration as the CEO has already stated. This ramping of growth into a secular tailwind just superchargers the business prospects looking out 12 months. Just working through it, you are more likely to pursue exterior projects then interior projects and letting tradesmen into your house during this period. Falls right into RenoWorks lap.
iLookAbout Corporation – ILA.V 0.135/share (0.11 – 0.31/share 52 week range)
This is my personal favourite, I love these consolidation trades where the acquired business is not reflected yet in trailing numbers. Especially when the CEO came from a billion-dollar company within the sector.
iLookAbout provides digital solutions for Property Tax and Appraisals for some of the largest players in the space from Freddie Mac to the City of Toronto.
There was significant insider buying early this year in the 0.24 – 0.26/share range so clearly they were seeing something they liked. There is a massive opportunity here from the COVID accounting delay where management hasn’t been able to support the stock price until financials come out at the end of the month and people are not willing to look at it.
On the Numbers;
They have already guided to core growth in its property tax division of 20% but the real kicker is the guided growth in the acquired Clarocity business that was heavily indebted as they are now able to reengage with customers as the cap structure has been cleaned up with ILookAbout acquiring it and have already guided to 100% organic growth for this division.
I just want to point out here the access to capital that these guys have been able to maintain, they financed the convertible debenture for the Clarocity transaction at (0% in yr 1. 3% in yr 2. 6% in yr 3&4)
Throw on top Tier 1 Bank financing through BMO at prime +4% you don’t see many of these small cap companies being able to borrow at these rates. It is a massive vote of confidence in not only the model but management.
On a NTM basis, management has guided as of June 10 in their updated slide deck $32.5M in Revenue w $3.0M in EBITDA for a valuation of 0.5x Sales and 5x EBITDA.
Even if they can come anywhere near that number its is probably one of the cheapest names you can look at with a high margin SaaS business non the less.
What it’s Worth;
On the blended multiple above for the sector 10x EV/Sales or 30x EV/EBITDA it would be worth 2.45/share or 0.78/share plus or minus a couple cents.
Clearly it’s not worth that much, but it is just a great exercise to how blown out some of these small cap names are to their larger peers.
My north star is always 5.0x EV/Gross Profit for these SaaS names, that would equate to a valuation of 1.45/share or just a casual 10x bagger.
In Summary, you have seen comparable businesses in REAL.TO just fly to >8.0x Sales recently and even AIF.TO where the CEO of iLookAbout had come from trading at >3.0x Sales all while the organic growth profile of iLookAbout I think is better than both of those.
Atlas Engineered Products Ltd. – AEP.V 0.265/share (0.19-0.61/share 52 week range)
This is the play on new home construction and the move out of the city and into the suburbs. They have 90% exposure to residential and only 10% commercial with exposure to all the hottest real estate markets in Canada right now from north Vancouver to all the way down the 401 Hwy corridor from London to Ottawa.
Atlas prebuilds wood trusses, windows, floors and door frames.
The management team pissed off a lot of people with the deep in the hole equity raise last fall which in hindsight looks better after the Covid impact to secure the balance sheet but they have a long way to go to rebuild confidence and hit a guidance number.
On the Numbers;
I am not going as in depth here because I have little to no faith in this company and how they guide the street in their latest guide of annualized exit FY20 run rate of $70-80M revenue given their lack of ability to hit a guidance number in the past.
With that out of the way, there is massive upside from a revenue and even a margin perspective from its pre-existing factory footprint from product line expansion and leaning into technological CapEx advantages in equipment that have the ability to increasing the capacity of the existing footprint instead of acquiring lower margin business.
It has gotten to the point where it has gotten so cheap, that even if it gets anywhere near that guidance number it’s way too cheap. However, in the number you are reliant on close to $16-20M in capital deployment in acquired revenue. The problem with this one unlike the other three SaaS names to play this trend is trying to determine what it’s worth given the financial profile and heavy cyclicality of the business but let’s give it a go.
On a NTM basis, I see them generating $45M in Revenue and $6.5M in EBITDA for a current valuation of 3x EBITDA.
I am not including further acquisitions in that number because I don’t see any acquisitions closing before Q4 as there is so much uncertainty in the world today and its tough to acquire businesses that would be trading at a high multiple than what you stock is trading at in theory on a NTM basis.
What it’s Worth;
I think you put an 8.0x EBITDA multiple on this business or 0.90/share or 240% upside in a bull case scenario.
There is still significant uncertainty in their ability to execute and what a normalized margin profile of the business can reach as its been so volatile. Execution, Execution Execution that is the story.
I just don’t have a good gut feel on the business but the upside scenario given the secular tailwinds and I think the big thing is the growth in total contractor bill they are able to generate over time but all I know its dirt cheap and good things tend to happen to cheap stocks.
In Summary, these small cap names always have some hair on them but I guess that’s why you are able to buy it at 3x EBITDA.
So there you have it, 4 names all that are well off their 52 week highs in a sector that is about to break out to all time highs.
I just want to leave you with one more point before you make your own decision. Insider Buying, they all have had significant insider buying in 2020 already and that hasn’t stopped their stock prices coming down.
UI – as high as 0.065/share (44% above current market price)
RW - as high as 0.29/share (16% above current market price)
ILA – as high as 0.255/share (89% above current market price)
AEP – as high as 0.40/share (51% above current market price)
LONG – all 4
I think all 3 of those SaaS names could be takeouts by larger players in the space