Altus Group is fully priced, National Bank Financial says

National Bank Financial analyst Richard Tse is telling investors to wait for a better entry point on Altus Group (Altus Group Stock Quote, Chart, News TSX:AIF).

In a report to clients on November 7, Tse reviewed the company’s latest quarterly results and maintained the “Sector Perform” rating that he proposed in a downgrade from “Sector Outperform” on October 22.

Real estate software and analytics company Altus Group released its third quarter financials last Thursday, posting $137.0 million in consolidated revenues, up 13.6 per cent from a year ago, and consolidated profit in accordance with IFRS of $5.0 million, up from a loss of $1.7 million a year earlier.

“We are very pleased with the sustained, double-digit topline and earnings growth in our consolidated results in the third quarter driven by another solid quarter at our Property Tax business and robust performance at Altus Analytics where recurring revenues grew 12 per cent year-over-year,” said Robert Courteau, CEO, in a press release. “Having just launched the first cloud-enabled version of ARGUS Enterprise less than three months ago, we are very encouraged by the feedback and experience from the numerous clients who are now on our cloud platform.”

Overall, the $137-million top line was lower than Tse’s $140-million estimate but in line with the consensus $137 million. Adjusted EBITDA of $19.8 million was also lower than Tse’s $21.4-million forecast and the Street’s $20.8 million.

Drilling down, Tse pointed out Altus’ Analytics segment which saw revenue grow 14.4 per cent year-over-year to $50.4 million, better than the analyst’s $50.2 million estimate, with non-recurring revenue coming in stronger than anticipated.

Property tax continued to drive the bulk of growth in the company’s Commercial Real Estate (CRE) segment, which grew 26.5 per cent year-over-year to $49.3 million, with strong regional volumes, according to the company, in the UK, Ontario, Manitoba and Quebec.

Tse thinks that there continue to be enough growth opportunities on the horizon for Altus’ Analytics and Tax businesses to eventually drive an upward valuation re-rating over the long term but the current stock price has a lot of the near-term expectations already baked in, according to the analyst.

Clarifying his downgrade of last month, Tse says there was no fundamental driver for the move but that it was caused by the stock price having moved to within inches of his target.

“With the Q3 results – that view is unchanged,” writes Tse. “While we think there is a potential opportunity for an upward re-rating in AIF when the Company fully executes on its Cloud transition, we think the stock has priced-in a meaningful chunk of that near-term execution already; which includes the turn in Property Tax given the 56 per cent return this year.”

“In our view, the fiscal Q3 results has our view unchanged with a slight shortfall to consensus and below our expectations. Looking ahead, we like the approach of aggressively pivoting the entire Altus Analytics segment to Cloud – we’d just rather wait to see that unfound at critical mass before reassessing a valuation/estimate revision re-rating. Based on our analysis, we’re still very early in a two- to three-year pivot ,” Tse writes.

Along with the reiterated “Sector Perform” rating, the analyst is maintaining his $40.00 target, which represented a projected return of ten per cent at the time of publication.