Current Price: $79 Price Target: $85 (raised from $80)
Position Size: 2.6% TTM Performance: 32%
Key Takeaways:
· Better than expected revenue and EPS. Full year guidance better than expected. Exceeded expectations on higher origination volumes and continued improvement in data and analytics sales.
· Lower foreclosures is a headwind: as they indicated last quarter, they are seeing lower foreclosure-related volumes in their Specialty Servicing software business due to the foreclosure moratorium.
· Data & Analytics accelerated (+21% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.
· CEO Anthony Jabbour said… “the solutions that we are driving in this digital mortgage world that we’ve been talking about many times on these calls…the pandemic has accelerated the need for them. So we’re just in a great spot right now.”
Additional Highlights:
· Q4 Revenues were -1% and adj. EPS was +6%.
· Mgmt. highlighted several new client wins in Servicing and Origination and the recent completion of the Bank of America implementation this past week.
· Their stake in D&B is now worth $1.4B w/ the recent IPO. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of ~$900m.
· Optimal Blue acquisition which enhances their origination and Data & Analytics businesses – expected to close in Q3.
· Data analytics segment (~15% of revenue) revenues were up 21%, an acceleration from 16% last quarter. Driven by growth in their property data and portfolio analytics businesses.
o EBITDA margin +970bps YoY.
o Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. They continue to see promising momentum in this business.
o Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. This is helping w/ loan origination despite social distancing, and implementing forbearance plans. They’ve seen significant interest in and adoption of their expedite e-close and e-sign solutions as well as their loss mitigation solution since the beginning of the pandemic.
· Software Solutions segment (~85% of revenue) down -4%.
o Within this segment servicing (~70% of revenue) was down -12.5% driven by previously discussed headwinds – a client de-conversion and lower foreclosure related volumes due to the foreclosure moratorium as part of the CARES Act.
o They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is >60%.
o Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 36% in Q2 – an acceleration from +18% last quarter. Volumes were stronger than expected. Lower rates help this business. Growth driven by new clients, a tuck-in acquisition, as well as higher refinanced volumes in their Exchange and e-Lending businesses.
o Segment EBITDA margin down 70bps YoY.
· Full year 2020 outlook:
o Revenues of $1,170 million to $1,184 million. Lower-end increased slightly – guidance reflects the expected lower foreclosure related volumes as a result of the foreclosure moratorium. ~$39m headwind in 2020.
o Adj. EPS of $1.94 to $1.99 (previously $1.90 to $1.97), street at $1.93
o Adj. EBITDA of $572 million to $583 million (previously $568m to $583m)
Valuation:
· Trading at <4% FCF yield on 2021 –valuation is getting more expensive but 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 which should taper as they grow.
· $1B in net debt – that puts their leverage ratio at 1.7x. This will go up to >3x with Optimal Blue acquisition.
· Capital allocation priorities include opportunistic share repurchases, debt pay down and 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.
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[tag BKI}
[category earnings]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$BKI.US
[category earnings]
[tag BKI]