CIGI - Colliers International: Risk-Reward Is Fair

Summary

• The key investment merit for Colliers International is its defensive top line mix with a higher proportion of recurring revenue as opposed to transaction-based revenue.
• CIGI's key downside risk relates to its unfavorable credit profile which is evidenced by its high debt-to-EBITDA ratio.
• Colliers' balanced risk-reward profile justifies a Hold rating for the company's shares.

Elevator Pitch

My investment rating for Colliers International Group Inc.'s ( CIGI ) stock is a Hold. There are both risks and rewards relating to CIGI. On the negative side of things, CIGI's credit profile isn't favorable judging by its high net debt-to-EBITDA metric. On the positive side of things, Colliers' percentage of top line contributed by recurring revenue businesses is reasonably high at more than 50%. In addition, CIGI's current EV/EBITDA valuation is in line with its historical average. Therefore, I view Colliers International as deserving of a Hold rating.

Company Description

On its corporate website , Colliers International refers to itself as a "professional services and investment management company" which offers "real estate and investment advice." CIGI highlighted in its November 2022 presentation slides that it boasts an AUM (Assets Under Management) of around $92 billion and manages approximately two billion square feet of real estate.

CIGI earned 42%, 25%, 25%, and 8% of its most recent Q3 2022 revenue from its outsourcing & advisory, capital markets, leasing, and investment management businesses, respectively as per its third quarter earnings presentation .

Colliers International has a presence in 63 markets around the world. Specifically, the Americas, EMEA, and Asia Pacific geographical markets, accounted for 63%, 15%, and 14% of CIGI's top line for the third quarter of last year, respectively. The remaining 8% of Colliers' International Q3 2022 revenue is contributed by its investment management business whose revenue can't be easily segregated by geography.

Reasonably Defensive Revenue Mix

CIGI has a relatively higher percentage of the company's top line and operating income derived from recurring revenue streams, rather than transaction-based revenue streams. This implies that Colliers International's revenue is relatively more resilient in difficult economic times like what we are witnessing today.

Colliers International has four key businesses, namely investment management, outsourcing & advisory, leasing, and capital markets. The former two are recurring revenue streams, while the latter two are transaction-based revenues.

As revealed in its November 2022 investor presentation, businesses which generate recurring revenue (outsourcing & advisory and investment management) contributed 51% and 55% of CIGI's top line and EBITDA, respectively for Q3 2022. The higher recurring EBITDA percentage contribution (55%) for Colliers International as compared to its recurring revenue percentage (51%) implies that CIGI's investment management and outsourcing & advisory businesses also have superior profit margins as compared to its capital markets and leasing businesses.

More importantly, Colliers International has the potential to become an even more defensive and resilient company in the years ahead. CIGI has set a target of increasing its recurring EBITDA percentage from the current 55% to as high as 65% in end-2025.

Mergers & acquisitions or M&A are a key part of CIGI's strategy to grow recurring revenues. Colliers International acquired asset management firms, Pangea , Versus Capital , and Basalt in December 2022, October 2022, and June 2022, respectively to expand its investment management business.

But an aggressive inorganic growth approach comes at a price, as discussed in the subsequent section.

Unfavorable Credit Risk Profile

Colliers International's net debt-to-EBITDA or financial leverage was a very comfortable 0.3 times as of the end of the fourth quarter of 2021. But CIGI's financial leverage metric went up to 2.0 times as of September 30, 2022, which incorporated the financial impact of M&A deals were disclosed by end-Q3 2022. It is reasonable to come to the conclusion that CIGI's current credit risk profile isn't favorable based on its debt-to-EBITDA ratio.

Based on financial data taken from S&P Capital IQ , the sell-side analysts covering Colliers International's stock expect its net debt-to-EBITDA ratio to rise further to 2.42 times by end-2023. It is likely that the analysts considered the effects of new acquisitions and the company's EBITDA outlook for the current year in arriving at this financial leverage ratio estimate for 2023.

In terms of the potential impact of higher debt on CIGI's profit and loss, the sell-side predicts that Colliers International's interest costs will continue to increase in the near future. Specifically, the market's consensus financial figures taken from S&P Capital IQ point to Colliers International's interest expenses surging by +55% in FY 2023.

As a property services and management company, Colliers International has a cost structure that comprises of a higher degree of fixed costs as compared to variable costs. This means that CIGI is at risk of having its earnings being negatively impacted by operating leverage when its revenues decline in a tough economic environment. Even though I highlight CIGI's relatively defensive revenue mix in the preceding section, it is worth noting that Colliers International still has roughly half of its top line coming from transaction-based and cyclical revenue streams such as capital markets and leasing.

An increase in financial leverage adds to the woes of a firm with high operating leverage characteristics like Colliers International. A large amount of debt translates into a higher proportion of "fixed" interest expenses which don't vary with CIGI's revenue. Assuming a worst case scenario for which CIGI's transaction-based revenues generated from leasing and capital markets fall by a much larger extent than expected, Colliers International's operating profit and bottom line might be severely hurt by "sticky" expenses including interest costs.

Concluding Thoughts

In my opinion, Colliers International's shares warrant a Hold investment rating. After considering both positives (reasonably high proportion of recurring revenue) and negatives (high debt-to-EBITDA ratio) associated with CIGI, a Hold rating for Colliers International stock seems fair. CIGI's current consensus forward next twelve months' EV/EBITDA multiple of 10.9 times (source: S&P Capital IQ ) is also the same as its 10-year historical average, implying that the company's shares are fairly valued based on a historical comparison.

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