Current Price: $81 Price Target: $96
Position Size: 2.4% TTM Performance: +9%
Key Takeaways:
· BKI reported a strong quarter and guided revenue and EBITDA in line w/ consensus. The stock is lower on weak EPS guidance – driven by higher depreciation, interest expense, and earnings on non-controlled interests.
· Exceeded expectations on in both segments w/ 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. This will likely continue until 1H22 w/ the moratorium extending through Sept.
· Data & Analytics strength (+16% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.
Additional Highlights:
· Q4 Revenues were $342m, +14% (Optimal Blue added $32m) and adj. EPS was +11%.
· Segment organic revenue guidance: Servicing software +mid-single-digits, origination software +low-double-digits, D&A +mid-single-digits puts total company +6%.
· Their stake in D&B is now worth $1.3B. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of ~$800m.
· Data analytics segment (~15% of revenue) revenues were up 16%. Driven by growth in their property data and portfolio analytics businesses.
o EBITDA margin +310bps 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. 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) up 14% YoY.
o Within this segment servicing (~70% of revenue) was up 2% – new client loan growth helped offset 6% ($12M) foreclosure moratorium headwinds.
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 56% as it was the first quarter that included the Optimal Blue acquisition. Lower rates help this business. Growth driven by higher refinanced volumes in their Exchange and e-Lending businesses.
- Segment EBITDA margin down 180bps YoY.
Valuation:
· Trading at ~3% 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.
· Leverage ratio at 3.8x. Increased from <2x with recent acquisitions.
· Capital allocation priorities include debt pay down, opportunistic share repurchases 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]