Share price: $60 Target Price: $60
Position size: 2.3% TTM return: 9%
BKI reported a good quarter but lowered guidance. Revenues were +6%, slightly below consensus and adj. EPS was better at $0.49 vs $0.48 consensus. Adj. EBITDA of $148m was above consensus of $146.5m. They updated guidance to the low end of the previously given range – the decrease was due to an earlier than planned client loss from a single-client product they are discontinuing. In general, the results highlight ongoing strength in their core business as they continue to win new clients and successfully expand existing relationships through cross-selling and contract renewals.
Key Takeaways:
· Despite slightly weaker than expected revenues in 2Q their strong new client pipeline in both mortgage servicing and origination software should accelerate revenue growth.
· Long term targets continue to be 6-8% revenue growth and mid-teens EPS growth. By segment, management continues to expect mid to high-single digit growth in Servicing, high-single to low-double digit growth in Origination, and low to mid-single digit growth in Data & Analytics.
· Data analytics segment (~15% of revenue) revenues were up 3% driven by growth in their property data and portfolio analytics businesses. This is a lower margin segment that has been seeing margin improvement, however this quarter margins contracted by 160bps. Adjusted EBITDA decreased 4% to $9m due to higher personnel costs as they grew their sales team
· Software Solutions segment (~85% of revenue) was up 7% driven by higher average revenue per loan and loan growth on their core servicing software solution.
o Segment EBITDA margins increased by 90bps.
o Within this segment servicing (~70% of revenue) grew 7%. This is steadier than their originations revenue. They continue to dominate first lien loans with leading share and are growing share in second lien loans. Once current commitments are implemented they will have ~70% share in first lien and ~30% share in second lien.
o Originations (~15% of total revs) made up of new loans and refi’s – revenues increased 8% driven by growth in their loan origination software business (Empower) which was up 18%. Counter cyclical aspect to this segment where falling rates bode well for mortgage origination volumes, primarily by increasing refinance activity.
· BKI has consistently performed well through tough times for their end clients, partly because they’re providing them with solutions that solve their problems like increasing efficiency and maintaining regulatory compliance.
Valuation:
· Trading at ~3.9% FCF yield –valuation is supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex (~9% of revenue now) which should taper as they grow.
· Leverage ratio now at 3x, 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
www.crestwoodadvisors.com
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