Share price: $52 Target Price: $55
Position size: 2% TTM return: 9%
Key Takeaways:
· They beat revenue and EPS expectations. Adjusted revenue was up 6%, above the midpoint of their original guidance. Adjusted EPS was up 35%, above the high end of their guidance range, partly driven by a lower tax rate. Guidance issued for 2019 was a little below expectations.
· Data analytics segment (~15% of revenue) revenues were up 7% a big improvement from +2% last quarter. Growth was primarily driven by portfolio analytics and multiple listing service businesses. This segment is lower margin, but margins are improving – they were up 150bps for the quarter and 30bps for the year.
· Software Solutions segment (~85% of revenue) was up 6% driven primarily by strong loan growth on their core servicing software platform from new and existing clients, higher average revenue per loan and new client wins.
o Within this segment servicing (~75% of revenue) grew 7%. This is steadier than their originations revenue. They continue to dominate first lien loans with 62% share and are growing share in second lien loans. They have high-teens share of second lien and expect to reach 30% once current commitments are implemented.
o Originations (~10% of total revs), which is made up of new loans and refi’s, grew 4%. Driven by 35% growth in loan origination system solutions, partially offset by the effect of lower refinance origination volumes. Refinancing volumes, down 40%, continue to be negatively impacted by rising rates.
o Segment EBITDA margins expanded 60bps for the quarter and 190bps for the year.
o Trends in this segment highlight a dynamic weighing on US housing statistics. The issue is a lock-in effect from lower mortgage rates. Homeowners have mortgage rates lower than prevailing rates making them less likely to sell as it would mean taking out a new mortgage at a higher rate. This is decreasing housing inventory and existing home sales. The average length of homeownership tenure has been rising from around 4 years in 2000 to over 8 years now.
Valuation:
· Valuation is reasonable. Trading at a ~4.8% FCF yield is reasonable given growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which are supported by high incremental margins and capex (~9% of revenue now) which should taper as they grow.
· Balance sheet continues to improve. Leverage ratio now at 2.5x, though this will ratchet up because of Dun & Bradstreet.
· Capital allocation priorities include opportunistic share repurchases, debt pay down and potential acquisitions.
Thesis:
- Black Knight is an industry leader with leading market share of the mortgage servicing industry.
- Stable business with >90% recurring revenues, long-term contracts and high switching costs.
- BKI has high returns on capital and high cash flow margins.
$BKI.UA
[tag BKI}
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
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