Description

Altus is an integrated software and services business focused on the commercial real estate industry. With their Argus software already established as the market standard in the industry, and their growing suite of product offerings, the company should have many years of easy growth ahead of them. Despite this, some recent lumpiness in the business has caused shares to fall close to 40% from their highs in 2017 creating an attractive entry point. An undemanding SOTP methodology gets us to a target price of $36, good for a 56% return from today’s levels.

Business Description:

Argus sells its products through the Altus Analytics division (technology) and the Expert Services division. Both are focused on commercial real estate users (CRE).

Analytics is comprised of their Argus software, which was the company’s core tech product, and voyanta.

·         Argus is the industry standard for DCF modeling and valuation in CRE, used by over 6,000 different firms around the world and almost all of the top 50 firms. Altus has also built out budgeting and scenario analysis into the software where inputs flow into the rest of the work modules.  

·         Voyanta is the data management software that was acquired in 2014. It consolidates the users data from all partners and 3^rd parties and standardizes it to cut down on errors. This allows for easier reporting and analyzing.

My favorite part about this business is when customers sign up, they are required to share their proprietary data with Altus. Is it amalgamated with the rest of the data and reported anonymously for benchmarking purposes but creates a massive moat of information that would be almost impossible for a competitor to replicate. Is it from that strong base in valuation and DCF that Altus is building out extra products and modules to upsell users.

Expert services is comprised of the Property Tax division and Valuation and Cost advisory

·         Property tax is the more interesting division of the two. Here the company uses its data to help CRE owners appeal municipal tax bills. Most of the work is contingency based, meaning Altus gets paid a percentage of the client savings. This works out better for Altus in the long run but can lead to lumpy quarters.

·         Valuation and cost is primarily a Canadian division. It is a services appraisal business of properties and the costs analysis of construction and project management.

Valuation and Cost is a fine business with reliable revenues and stable margins but has very little growth opportunities. There is a final division called Geomatics which is effectively land surveying for the oil and gas industry. It generates very little profit and is carried at almost zero in our SOTP.

History:

Altus was a Canadian focused real estate services business, until they acquired Argus in 2011. The purchase nearly bankrupted the company, with shares falling to a low of $3 later that year. That prompted shareholder backlash that ultimately got the then CEO fired. After a search, the company eventually hired Robert Courteau whose previous job was head of sales for SAP North America. Bob left SAP after missing a quarter badly and falling out with the CEO. After 6 months off, he decided to take the job at Altus, which is a testament to the potential he saw in being able to grow Argus software into much larger business than it was at the time. Altus was trading for 8$ when Bob came on board.

Bob pretty much executed according to the plan he laid out for shareholders, which was transitions Altus from a mostly services business to a mostly tech business. It was smooth sailing until late 2017 when the stock peaked at $37.

Since then a series of temporary factors have acted to drive Altus’s stock price down to today’s level of $23. I believe this creates an attractive entry point with good catalysts over the next few years.

Issues:

In mid 2017 Altus end-of-lifed Argus DCF, the original Argus product. This created a flush demand for new licenses, which lead to quite strong sales in Q2 and Q3. The impact of this is difficult comps for 2018, with revenue in Analytics only growing 4% over the first 9 months of the year. Compounding this was the roll out of AOD in 2018, the Argus cloud product. This also lead to lower perpetual license sales.

These comps should be easier from here on out. Indeed in Q3 recurring revenues in this division grew 23%, showing the underlying strength. Management also guided for revenue growth of mid teens to low twenties percent over Q4 2018 and Q1 2019. This strong finish to the year and handoff into 2019 should allow the division to reaccelerate revenue growth. Even with a weaker 2018 the division shows a 4 year revenue CAGR of 18.8%, most of which is organic.

The Analytics division has also featured heavy investment this year with the rollout of AOD, which has compressed division margins from 28.6% in 2017 to an expected 23% in 2018. This should rebound to a more normalized 25% next year as the heavy investments have already been made.

The other issue to overcome is temporary weakness in Property Tax. As mentioned above, Property Tax revenue is primarily based on contingency. The two largest geographies of the division, the UK and Ontario, Canada, have both begun new 5 year property rolls in 2018. With assessment work beginning this year, wins don’t begin to monetize until 2019 and beyond. The UK became the largest geography in 2017 when Argus made a UK acquisition and is now the market leader with a 20% share. At the time of the acquisition, Bob indicated through the 5 year life of the property roll cycle, Altus paid 5.5x EBITDA. They have also said that division will be zero EBITDA in 2018. Using simple math it becomes apparent that in the 4 years with profitability,  incremental EBITDA should average 14mm. This is a pretty substantial step up for a company that will do about 80mm total in 2018. Of course it will not be so linear, and we should expect 2019 EBITDA contribution from the UK to come in below that number, with the next 3 years continuing to ramp.

Ontario is also extremely weak this year, due to the new property tax roll. On the Q3 call management said there have been less than 20 hearings in 2018, vs a normal year of 2000-3000. So effectively we have zero EBITDA contribution from the two largest geographies in 2018. This EBITDA will shift into the 2019-2022 period, creating a meaningful ramp in results

Estimates and valuation:

The big step up in results next year is driven by the rebound in Property tax and the lapping of tough comps in Analytics. Net it gets us to an over 25% EBITDA growth rate. This is higher, but not greatly so, of consensus estimates of $100.6 million

For valuation, I believe a SOTP is appropriate given the different businesses. The 20x EBITDA I ascribe to the Analytics division works out to about 5x revenues. This is actually a bit below software companies with 10%+ growth rates and 20%+ margins. It is also below real estate tech stock, Costar group, which trades for 23x 2019 EBITDA. I believe Analytics is a better business than Costar, which is not entirely tech. Analytics has a large installed based and benefits from being the market standard and uses that position to expand into new modules.

For Property tax and Valuation we use 10x, which is in line with other low capex service companies.

The SOTP equates to a $36 shareprice which is substantially above today’s levels.

Conclusion:

I think Altus is a great business, driven by the strength of their Argus franchise and the leadership of the CEO Robert Courteau. The company is the industry standard in their field, and gets stronger every day with their proprietary data. They are using this strength to expand into new verticals, and improve outcomes in their CRE services business.

Temporary factors have lead to a slowdown in growth in 2018 that will reverse in 2019. At todays price you are paying 18x EV/FCF 2019 for a phenomenal business that will compound for years to come.

Catalyst

Property tax ramp up

Lapping tough comps