CIGI - Colliers International: Favorable 2023 Ebitda Growth Outlook

2023-04-17 14:48:20 ET

Summary

• The recent Greenstone deal suggests that CIGI is strengthening its revenue profile by growing the top-line contribution from recurring revenue streams and other geographic regions outside Americas.
• Colliers International is guiding for a +16% increase in EBITDA for 2023, and this is supported by multiple factors such as an increase in investment management revenue and inorganic growth.
• CIGI's shares are undervalued, as the stock's P/E multiple is below its historical mean even though the company's 2023 outlook is positive.

Elevator Pitch

I have a Buy rating for Colliers International Group Inc.'s ( CIGI ) ( CIGI:CA ) shares.

With my earlier January 30, 2023 update , I touched on Colliers International's revenue mix and financial leverage. My attention turns to CIGI's outlook in this latest write-up. The company's near-term prospects are excellent, in consideration of its mid-teens percentage EBITDA growth guidance. But the market is currently valuing Colliers International at a P/E multiple representing a huge discount to its 10-year historical average, which I think is unjustified. This explains why I have chosen to upgrade my rating for CIGI from a Hold to a Buy.

Recent Acquisition Has Positive Read-Throughs For CIGI

Seeking Alpha News recently reported on April 12, 2023, that Colliers International bought "a controlling interest in Greenstone Group, a leading project management and property advisory firm in New Zealand." In its press release disclosing this recent deal, CIGI specifically mentioned that Greenstone will be part of the company's "market-leading New Zealand operations" going forward and help to increase revenue contribution from its "recurring professional services businesses."

In my view, there are positive takeaways from Colliers International's most recent acquisition, even though the company didn't provide financial details relating to this transaction.

The purchase of a "controlling" stake in Greenstone is expected to allow CIGI to diversify its top line and reduce its dependence on the Americas market to some extent. In 2022, the Americas region contributed 62% and 53% of Colliers International's revenue and adjusted EBITDA, respectively as per the company's Q4 2022 earnings presentation .

As a comparison, the Asia-Pacific market, which includes New Zealand, only accounted for 13% of both CIGI's revenue and adjusted EBITDA for FY 2022. A relatively more balanced revenue mix by geographic market in the future driven by the Greenstone transaction and other potential deals will help to reduce volatility with CIGI's top line, assuming that there is uneven economic growth across different regions.

Separately, Colliers International's EBITDA derived from recurring revenue streams as a percentage of total EBITDA was 58% in fiscal 2022, and CIGI has set a goal of increasing this percentage to 65% in three years' time. The addition of Greenstone, with its businesses in "project management and property advisory", to CIGI's business portfolio is expected to grow the company's recurring EBITDA contribution.

At the company's Q4 2022 earnings call on February 9, 2023, Colliers International highlighted its expectations of "capital markets activity to be down 20% to 40%" YoY in 1H 2023. Notably, the capital markets business accounted for a meaningful 24% of CIGI's FY 2022 revenue. As such, it is important that CIGI continues to diversify its top-line mix and increases the proportion of recurring revenue, which Colliers International has done with the recent Greenstone deal.

In a nutshell, the Greenstone transaction announced last week shows that Colliers International is taking steps to further improve revenue quality with respect to geographical diversification and expanding recurring revenue contribution.

Colliers International's EBITDA Growth Guidance For 2023 Is Encouraging

CIGI sees its non-GAAP adjusted EBITDA growing by +16% from $630.5 million for fiscal 2022 to $730 million for FY 2023 based on the mid-point of its financial guidance outlined in its Q4 2022 results presentation. As a reference, Colliers International's normalized EBITDA also increased by +16% in FY 2022. In other words, CIGI expects to deliver an EBITDA growth rate for FY 2023 that is same as what it achieved for FY 2022, which is very impressive considering the weak economic environment.

In the preceding section, I discussed about Colliers International's reasonably high proportion of recurring EBITDA, which will be one of the key factors supporting CIGI's favorable EBITDA growth guidance.

Other positive factors for CIGI including inorganic growth, the stability of leasing revenue, and the growth in revenues generated from investment management.

Colliers International revealed at its recent fourth quarter earnings briefing that acquisitions done in 2022 will contribute about $75 million or around 10% of the company's EBITDA guidance for FY 2023. These M&A deals have already been concluded, so the $75 million EBITDA contribution from these transactions is essentially "locked-in" for CIGI.

In its Q4 2022 earnings presentation, CIGI stressed that its "leasing revenues" are "expected to remain steady" in the current year. Colliers International also emphasized at the Q4 2022 results call that "leasing has got some interesting repeat qualities that are not really seen by most people." Based on these comments and disclosures, it is reasonable to assume that CIGI's leasing revenues for FY 2023 might turn out to be far more defensive and resilient than what most investors or analysts would expect. It also helps that Colliers International's leasing business is diversified with a mix of both industrial and office properties.

Lastly, CIGI guided at its fourth quarter earnings briefing that revenue contribution for its investment business is "expected to grow significantly from continued capital raising for several products we have in the market." Approximately 70% and 85% of the assets managed under Colliers International's investment management business are in "defensive asset classes" and "perpetual or long-dated investment strategies", respectively as indicated in CIGI's Q4 earnings presentation. This favorable asset mix explains why CIGI's investment management business is able to expand its assets under management in a challenging market environment.

Closing Thoughts

Colliers International's operating earnings growth outlook and its valuations aren't aligned, which is the key reason for CIGI's Buy rating. The market values CIGI at 13.4 times consensus forward next twelve months' normalized P/E which is much lower than its 10-year average forward P/E multiple of 17.8 times according to S&P Capital IQ's valuation data. In contrast, Colliers International is expected to maintain a reasonably fast pace of EBITDA growth this year as per its guidance. I believe that CIGI should trade at a higher valuation multiple closer to its historical average, considering its 2023 outlook.

For further details see: