Share price: $54 Target Price: Raising to $60 from $55
Position size: 2.2% TTM return: 12%
Key Takeaways:
· Slight beat on revenue and EPS, guidance maintained. Revenue was $283 (+5%) vs street $282 and EPS was $0.44 vs street $0.43.
· Adjusted EBITDA was $137 million, an increase of6%. Adjusted EBITDA margin was 48.4%, an increase of 50bps.
· 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 6% driven by growth in their property data and portfolio analytics businesses. This segment is lower margin, but margins are improving – EBITDA margins were up 200bps for the quarter.
· Software Solutions segment (~85% of revenue) was up 4% driven by higher average revenue per loan and loan growth on their core servicing software solution.
o Within this segment servicing (~75% of revenue) grew 4%. 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) made up of new loans and refi’s. Grew 7% primarily driven by 25% growth in their loan origination system solutions from new clients, partially offset by lower professional services and the effect of lower refinance origination volumes.
· Despite the economy being strong, their end markets (U.S. mortgage originators and Servicers) are actually weak. “Based on market conditions we’re in the midst of our clients recession. I know the economy is doing well and other industries are doing well, but with rates rising, it’s caused pain.”
· BKI has consistently performed well through a tough time for their end clients, partly because they’re providing them with solutions that solve their problems like increasing efficiency and maintaining regulatory compliance.
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.
· 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
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