Key Takeaways:
1. In-line revenue and better than expected EPS. Guidance essentially in-line with consensus. Q4 Revenues were +5% and adj. EPS was +8%.
2. Seeing increasing success with cross-selling Data & Analytics (~14% of revenue), which could be a solid future growth driver for them.
3. Solid contract renewals – they renewed more than 1/3 of the loans on their MSP mortgage servicing software with long-term contracts, indicating the strength of their product and client relationships.
4. As discussed on their last call, they will see a 5pt hit to top line in 2020 related to client de-conversions (PennyMac). No update on the progress of the PennyMac lawsuit.
Share price: $72 Target Price: Under review
Position size: 2.5% TTM return: 41%
Highlights:
· Guidance is for 2020 revenue of $1.19B to $1.214B and EBITDA of $589m to $607m and EPS of $1.97 to $2.06. They expect results to be 2H weighted with growth accelerating to the high end of their range in the second half of the year.
· 2020 Revenue growth is below LT targets due to one-time headwinds, excluding those headwinds they are w/in their LT range. Their long term targets continue to be 6-8% revenue growth and mid-teens EPS growth. By segment, the expectation is 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.
· In 2019, they renewed over 11 million loans (more than 1/3 of the loans on MSP) to long-term contracts last year.
· Signed 9 new MSP clients, representing nearly 500,000 loans, which is the most new client signed in a single year since 2013.
· Data analytics segment (~14% of revenue) revenues were up 11% driven by growth in their property data and portfolio analytics businesses.
o Trending ahead of LT targets in recent quarter on some “extraordinary cross-sales” related to new client deals, as well as renewals. This is promising momentum in this business and suggests they are finally gaining some meaningful traction.
· Software Solutions segment (~85% of revenue) was up 4%.
o They continue to gain share in this business.
o Within this segment servicing (~70% of revenue) was down 3% from a previously discussed client de-conversion. They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is ~63%.
o Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 43% in Q4 – 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. They signed 11 new Empower clients with 9 of those clients implementing Empower now and a strong pipeline going into 2020.
Valuation:
· Trading at <4% FCF yield on 2020 –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 (~9% of revenue now) which should taper as they grow.
· $1.5B in net debt – that puts their leverage ratio at 2.6x, high because of Dun & Bradstreet but decreasing.
· 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}
[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
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