KeyStone’s Stock Talk Show, Episode 236.
It’s great to be back with you again this week and even better to be conducting this episode without Brennan. We have 3 YSOT segments – kicking off with Aaron answering a viewer question on Bird Construction Inc. (BDT:TSX), a Canadian construction company operating from coast-to-coast and servicing all of Canada’s major markets. Q3 growth appeared strong on both an organic and acquisition basis and the viewer asks if the Bird is about to fly. I will answer a viewer question on Real Matters Inc. (REAL:TSX) which provides network management solutions to North American lenders and insurers. Its platform leverages independent field agents to deliver Appraisal and Title & Closing services. The stock, while flat on the year, is down over 80% since its pandemic highs. The viewer asks if we believe it has hit a bottom. Bringing up the rear, Brett answers a viewer question on Goodfellow Inc. (GDL:TSX), a diversified manufacturer of value-added lumber products, as well as a wholesale distributor of building materials and floor coverings. The stock is up 9% year to date at $7.15 and a market cap of $121 million paying a strong dividend yield of 7%. Brett will let you know if this historically cyclical business offers value in its current range.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and one part of the killer B’s, Brett.
Brennan, of course, is on a travel day as he returns from watching football, hockey, and his friends make fools of themselves in front of thousands of women in Vegas. We will get an update directly from the young man next week.
Real Matters Inc. (REAL:TSX)
Price: $5.35
Market Cap: $390.25 Million
Dividend: n/a
Company Description: Real Matters provides network management solutions to North American lenders and insurers. Its platform leverages independent field agents to deliver Appraisal and Title & Closing services.
Real Matters Inc. operates as a technology and network management company in Canada and the United States. It operates through three segments: U.S. Appraisal, U.S. Title, and Canada. It offers residential mortgage appraisals for purchase, refinance, and home equity and default transactions to the mortgage lending industry, as well as title services for refinance, purchase, home equity, short sale, and real estate-owned transactions to financial institutions under the Solidifi brand; and insurance inspection services to property and casualty insurers under the iv3 brand.
Real Matter has lost 84% of its value from its post pandemic highs in the $33 range. The stock is up 1%, or basically flat year-to-date.
Q4 2023 Financial Highlights
Net revenue dropped 22% to $11.2 million from $14.4 million and for the year dropped 50% to $43 million from $85.4 million.
Adjusted EBITDA was ~$600,000 from a loss of $1.1 million for the quarter.
The company reported adjusted net income of $0.01 in Q4 and a loss of $0.03 for the year.
On a positive note, REAL does have a good balance sheet and exited Q4 with net cash of $42.3 million or C$0.80/shr.
Valuation:
The forward-looking EV/EBITDA based on the company progressing to higher positive adjusted EBITDA is ~50.
Our Take:
Real Matters is operating in a difficult environment. Over the company’s recently reported FY 2023, U.S. mortgage origination volumes were the lowest on record in the last 28 years. Mortgage applications in October 2023 were the lowest since May 1995. It is estimated that for the first three quarters of 2023, mortgage originations are down about 30% relative to the same period a year ago. Suffice it to say, this is not good for REAL’s current business.
REAL posted a tremendous growth trajectory from 2014 when total revenues were $128.1 million to 2021 when revenues peaked at $638.6 million. This was during a historically low rate environment. As rates have risen, consolidated revenues have dropped from $638 in 2021 to $222.6 million in FY 2023.
While market volumes appear to be at trough, we do not yet have visibility on a sustained shift in the macro backdrop whereby interest rates fall and mortgage spreads begin to normalize. Current valuations are not cheap and appear to imply that a mid-term recovery is already priced in. Whether it has hit a bottom or not, it tough to estimate. What we do know is that there are plenty more companies in our coverage at present with lower valuations and better near to mid—term growth certainty than REAL – We pass on the company at present.
YSOT Goodfellow GDL:TSX
1)
Goodfellow symbol GDL on the TSX is a diversified manufacturer of value-added lumber products, as well as a wholesale distributor of building materials and floor coverings. Goodfellow has a distribution footprint from coast-to-coast in Canada servicing commercial and residential sectors through lumber yard retailer networks, manufacturers, industrial and infrastructure project partners, and floor covering specialists. Goodfellow also leverages its value-added product capabilities to serve lumber markets internationally.
2)
The stock is up 9% year to date at $7.15 and a market cap of $121 million paying a strong dividend yield of 7%.
3)
For fiscal Q3 2023 the company’s sales fell by 17% to $139 million, and for the YTD sales fell 19.6% to $387 million. This illustrates the shift in the lumber demand over the past year, as the post-COVID boom saw significant demand resulting in many purchasers overstocking inventory so now with lower demand they need to work off this excess inventory, ultimately lowering Goodfellow sales.
Gross margin remained consistent at 22.7% for the quarter compared to 22.6% in the prior year. Resulting in a gross profit fall of 16.5% $31.6 million from $37.9 million.
SG&A remained materially flat at $22 million. So as gross profit fell we can see the negative side of operating leverage in a distribution company, resulting in a significant decrease of 41.5% year-over-year to $6.2 million from $10.6 million or $0.72 from $1.24 on a per share basis.
The year-to-date EPS fell even more, by 55.4% to $1.47 to $3.30 a share. As well due to construction seasonality Goodfellow is also seasonal where Q2/Q3 are normally the stronger quarters.
4)
Looking at a 20-year quarterly earnings chart we can see that the EPS in recent years has been significantly higher than the historic norms. As well, you can see the distinct seasonality which is why you get that tooth-like pattern over time. Similarly, we can see a similar pattern with sales, but smaller percentage changes, with a similar spike during the post-covid years. You can also see that the company has effectively had no growth over the past 20 years.
5)
Moving to the balance sheet, the company holds cash of $8.0 million with the only debt being leases of $13.7 million resulting in net debt of $5.8 million. This is after paying off bank debt of $31.6 million over the past year., which is good to see. With distributors in any business as margins are small interest can quickly eat away at any profitability, especially during a cyclical downswing putting pressure on sales.
6)
Now looking at valuations,
Goodfellow is trading at a trailing PE of 7 times which is below the 10 year average of 10 times. Which may seem appealing as the company is below average, however you need to remember if lumber demand specifically relating to single family homes stays lower we could see further decline in earnings which ultimately results in a higher pe.
7)
However, you probably aren’t looking at Good Fellow for capital returns your looking at the 7% yield on it. The company at the current earnings has good dividend coverage at 50% of earnings, but that can quickly change due to what I’ve mentioned above. We can look at the historic dividend payments, and see the company is no stranger to cutting and raising the dividend based on its financials. I will though note the company did declare a dividend of $0.50 during the release of the last quarter so it has not been cut yet.
8)
Our Take,
Although the company appears to be cheap with a high yield, the dividend is not safe by any means given the historic tendency to cut and raise, the valuation will likely come up as the earnings will likely drop given the industry conditions at this time moving towards and perhaps above the long term average. As well, you can not expect growth from the company the growth in the COVID years was really the stars aligning and I wouldn’t be counting on it to occur that degree any time soon.
