[Update] Altus Group
Strange times call for strange capital allocation policies
You can find the latest piece in this series below:
I. Fool me once shame on me, fool me twice… and you can’t fool me again!
As quick recap of events so far:
To summarise a minorly tragic unfolding of events: the Altus board removed the former CEO who was hoping to sell the company to private equity for as much as $60-$70 per share, proceeded to replace him with the former CEO, the new management team then executed an SIB tender offer at ~$57 (technically a modified Dutch tender offer), and days later Claude released a document compiler tool that sent the stock of software and software adjacent businesses into free fall. Altus shares bottomed in the high 30’s. Recently, lady luck has not been on the side of management, or even the board for that matter.
In any event, the balance of the SIB authorisation has been earmarked for an on-market buyback over the next 100 days. Positive(ish).
I’ve joked this year, that one of the best trading strategies investors could have implemented was immediately buying puts on supposed AI losers who were just about to finish a large one-time buyback.
What is amusing (/potentially heart breaking) is that Altus decided to run this rather unpropitious setup not once but twice. Now, part of this is out of their hands. TSX listing rules limit the amount of share capital that can be returned to a company’s shareholders in any given 12 month period. Hence any large capital return outside of these fairly stringent limits (I believe 10% of the shares in any given calendar year) must be returned in large one-off single issuer bids (SIBs). The unfortunate consequence of this has been that AIF’s weighted share repurchase price has taken place at a much higher level than what the stock has regularly been trading for. In light of the rather depressed prices of this year, this has been a touch unwelcome.
In any event, and with the management team ploughing ahead, another SIB was undertaken in early April at a price of 52.00 CAD. The completion of these two SIBs, and with on market share repurchases following up, management has taken out an astounding 18% of the total shares outstanding this year. As you should be aware, they’ve been able to do this because the divestment path that the new(old) CEO laid out when he returned to the post last year has been all but completed. Appraisals is off the books as of Q1, One11 Managed Services sold April 30 (a part of Analytics), and Development Advisory is schedule for partial sale and wind down by years end (indeed its reporting lines have been move to discontinued operations). Q1 results were the first of AIF’s financial reports to basically represent an unencumbered read through of the core Analytics business. The crown jewel is essentially all that’s left in the store. Now it’s time for management to lap one-off expenditures and show the true underlying profitability of what are a collection of very good assets.
II. We’re off to a good start… again
Despite the disconcerting way in which we have got to where we are (ah, a board coup and an unexpected encore for Mike Gordon), it is undeniable that we are tracking nicely along the desired path of long-time (and long suffering) shareholders. The company has rid itself of its traditional services segments - tick. As I mentioned, AIF shareholders now enjoy fairly unencumbered exposure to the dominant valuation modelling tool in North America, and its associated ‘exhaust’ businesses (primarily VMS, but also optionality in benchmarking etc) - tick, tick. The capital return policy has been weighted heavily towards share repurchases - tick, tick, tick.
If you’re wondering “where to from here?”, the answer is simple. Gordon and co. imagine Altus as a rule of 40 company. Putting aside the company’s historic love affair with heavily adjusted (read fake) numbers, I read this as Altus exiting 27’ with approximately 10% normalised revenue growth, and a 30% operating margin. I’m quite positive on them achieving this. Software ARR growth has been accelerating (now growing nearly 11% annually) and VMS revenue growth has also been picking up nearly 10%. VMS is, of course, a heavily cyclical business tied to the health of the wider commercial real estate transaction market, which is squarely in the tank. Even if rates were to come down significantly overnight, I’m not sure we’d immediately revert to the transaction market of early 2020s, but a long term positive exposure remains in my mind. During those heady days, VMS growth held onto a 20-handle. Not bad for a business with incredible unit economics.