CIGI - Colliers International: Still A Buy Despite Earnings Miss

2023-11-03 01:30:14 ET

Summary

• CIGI's Q3 2023 results fell short of expectations due to an increase in interest costs and negative operating leverage for its Capital Markets business.
• But Colliers International's Capital Markets business performed better than the market in the recent quarter, and the company has set a goal to reduce its financial leverage by end-2023.
• I continue to assign a Buy rating to Colliers International based on my expectations of an improved set of results for CIGI next year.

Elevator Pitch

My Buy investment rating for Colliers International Group Inc. (CIGI) ( CIGI:CA ) shares stays unchanged.

I previously assessed CIGI's Q2 2023 financial performance in my earlier August 3 update . In this latest write-up, I review Colliers International's most recent quarterly financial results.

CIGI's Q3 2023 results were below expectations, and the company's stock price dropped by -7% on the date of the earnings release. But Colliers International's valuations are appealing and the company is expected to perform better in 2024, so I have kept my Buy rating for CIGI intact.

The Analysts' Expectations Of CIGI's Q3 2023 Results

The sell side was predicting that Colliers International could achieve both top line and bottom line expansion on a sequential or QoQ basis in Q3 2023 prior to CIGI's actual quarterly financial results release on November 2 before trading hours.

With regards to top line expectations, the market forecasted that CIGI's revenue will increase by +2% QoQ from $1,078 million in the second quarter of 2023 to $1,096 million (source: S&P Capital IQ ) for the second quarter of the current year.

With respect to bottom line estimates, Colliers International's normalized EPS was projected to grow by +28% QoQ from $1.31 for Q2 2023 to $1.68 in the most recent quarter. This would also have been equivalent to a +19.2% YoY rise in the company's earnings.

However, Colliers International failed to live up to the analysts' expectations as detailed in the subsequent section of the article.

Colliers International's Actual Third Quarter Performance Was A Disappointment

CIGI's actual Q3 2023 revenue and normalized EPS missed the market's consensus financial forecasts by -4% and -29% , respectively. Colliers International's third quarter EBITDA of $145 million also came in -12% lower than the sell-side analysts' consensus EBITDA estimate of $164 million as per consensus data taken from S&P Capital IQ .

Top line for Colliers International contracted by -2% QoQ and -5% YoY to $1,056 million in Q3 2023.

As indicated in its third quarter earnings presentation slides , CIGI's recurring revenue businesses Investment Management and Outsourcing & Advisory saw their top line contributions grow by +24% YoY and +14% YoY, respectively in the most recent quarter. Unfortunately, Colliers International's sales derived from the transactional Leasing and Capital Markets businesses fell by -9% and -42%, respectively in YoY terms for the third quarter. The weakness associated with CIGI's Capital Markets business in particular helped to explain why the company suffered from a revenue miss in Q3.

CIGI's normalized EPS decreased by -16% YoY and -9% QoQ to $1.19 for the third quarter of this year.

At the company's Q3 2023 earnings call , Colliers International noted that "margin compression in our transactional businesses (e.g. Capital Markets)" and "higher interest expense" were responsible for its Q3 earnings miss. The company's EBIT margin contracted from 7.6% in Q3 2022 and 7.0% in Q2 2023 to 6.7% for Q3 2023, while its interest expenses rose by +79% YoY in the third quarter.

The profitability of CIGI's Capital Markets and Leasing businesses is likely to have been affected by negative operating leverage i.e. a decline in revenue on a largely fixed cost base. On the other hand, Colliers International's net debt-to-EBITDA ratio increased from 1.5 times as of September 30, 2022, to 2.4 times as of end-Q3 2023 as revealed in its results presentation slides, and this drove CIGI's interest costs higher in the recent quarter.

Colliers International's shares fell by approximately -7% to close at $86.42 at the end of the November 2, 2023 trading day, which would have priced in the negatives relating to CIGI's earnings miss.

Things Are Expected To Get Better For CIGI

Colliers International's 2024 financial performance is expected to be better, even though its Q3 2023 results were disappointing. As per consensus numbers obtained from S&P Capital IQ , the market sees CIGI turning around from an expected -8.5% contraction in its bottom line for FY 2023 to register a +15.8% growth in its normalized EPS in FY 2024.

I hold the view that CIGI will achieve a good set of results next year for two key reasons.

The first reason is that Colliers International is well-positioned to benefit from a recovery in its Capital Markets business.

CIGI disclosed at its Q3 2023 results call that the -42% YoY revenue decline for its Capital Markets business in the most recent quarter was superior to the -51% sales drop for the industry at large. Therefore, Colliers International's Capital Markets business is likely to have gained market share from its weaker and smaller rivals in challenging times like these. Colliers International stressed at the company's third quarter earnings briefing that it is "confident that capital markets will rebound, perhaps in the second half of 2024." Therefore, it is realistic to assume that CIGI will enjoy a larger slice of the pie when the real estate capital markets eventually recover.

The second reason relates to the targeted improvement in CIGI's financial position.

As mentioned above, Colliers International's bottom line was hurt by an increase in interest costs for Q3 2023. Looking forward, CIGI has set a target of lowering its net debt-to-EBITDA metric from the current 2.4 times to 2.0-2.2 times (source: Q3 results briefing) by the end of 2023. This suggests that Colliers International's 2024 normalized EPS will be boosted by a decline in interest expenses.

Closing Thoughts

CIGI is now valued by the market at a reasonably modest 11.2 times consensus forward next twelve months' normalized P/E. As a comparison, the company's consensus FY 2023-2025 normalized EPS CAGR forecast is an impressive +14.3%. In a nutshell, Colliers International's valuations are enticing and an improvement in its financial performance for 2024 should help to bring about a re-rating of its valuations, although its Q3 results were poor.

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