The Black Knight Financial Services Inc. initial public offering (IPO) is slated for today, May 20, 2015. The company will list under the ticker symbol “BKFS” on the New York Stock Exchange.
Black Knight’s MSP servicing platform administers the most mortgages in the U.S. With a dominant software foothold in the mortgage industry, is Black Knight’s IPO worth considering?
Who is Black Knight?
Black Knight Financial Services Inc., out of Jacksonville, Florida, is the software company behind many mortgage and loan originators in the country.
Black Knight is owned by Fidelity National Financial, Inc. (NYSE/FNF)—the largest title insurance provider in the U.S., with several other holdings under its wings. Fidelity National Financial retains roughly 67% ownership of Black Knight, with the remaining stake attributed to Thomas H. Lee Partners, a private equity firm.
What is Black Knight Financial Services’ IPO Price?
Black Knight is looking to sell its stock at anywhere from $22.00 to $25.00 per share.
With one-third of 2015 behind us, there have been 63 IPOs to date, compared to 275 in 2014. A cooler market may mean meager returns for investors looking to ride the Black Knight IPO rollercoaster. (Source: Renaissance Capital, last accessed May 19, 2015.)
How Much Money Will the Black Knight Financial Services IPO Raise?
Black Knight is looking to sell 17 million shares within the aforementioned price range. At the bottom of the range, the Black Knight IPO will raise $374 million, and at the upper range, $425 million.
The Black Knight IPO will be one of the larger deals of 2015, as the average deal size to date has been roughly $178 million. The biggest IPO for 2015 in terms of proceeds was that of Tallgrass Energy GP, LP (NYSE/TEGP), which raised $1.2 billion.
How Much is Black Knight Financial Worth?
As of September 30, 2014, Black Knight’s total capitalization, or total worth, stood at $3.5 billion. If Black Knight’s IPO proceeds come in at the midpoint of its expected range of $400 million, the firm’s total capitalization will stand at nearly $4.0 billion. (Source: SEC F-1 Filing, last accessed May 19, 2015.)
The biggest company to go public in 2015 was EQT GP Holdings, LP (NYSE/EQGP). EQT went public on May 13 and currently trades at a market cap of $8.8 billion.
What is Black Knight’s Business Model?
Black Knight’s mortgage platform is used by 21 of the largest 25 mortgage originators in the U.S. and processes over 50% of all mortgages nationwide. The company claims that its solutions allow for efficient loan processing, document administration, and also provide mortgage performance data enabling risk mitigation. (Source: FNV 2014 Annual Report, last accessed May 19, 2015.)
The primary business driver consists of new mortgage applications, which use Black Knight’s technology platforms. According to the Mortgage Bankers Association, in the first quarter of 2015, new mortgage loan applications were 49% higher than during the same period last year. (Source: MBA, May 15, 2015.)
Major banks like Wells Fargo and JPMorgan Chase & Co. administer mortgages and other loans through Black Knight’s platforms. In fact, 27% of Black Knight’s revenue, for the period ending September 2014, was derived from the two banks. (Source: SEC F-1 Filing, last accessed May 19, 2015.)
Another source of business, according to Black Knight’s management, is the continued vitality of the mortgage industry, along with more stringent regulations. Regulators are seeking better disclosure, improved risk management, and enhanced compliance. (Source: SEC F-1 Filing, last accessed May 19, 2015.)
The larger regulatory burden continues to force mortgage industry players that wish to remain competitive to outsource their critical technology needs to third-party providers like Black Knight. The company believes that its experience serving the mortgage industry for over 50 years, along with its size, allow it to invest in new products that meet mortgage industry needs.
For example, in its SEC filing, Black Knight mentions launching a new workflow management application—“LoanSphere”—aimed at automating business processes across the mortgage loan life cycle. On top of innovative products, Black Knight believes that it has established long-term relationships with financial institutions in the mortgage business—making its revenue stream source sticky and highly visible.
What is Black Knight’s IPO Outlook?
Black Knight’s financial track record to-date has been spotty. In 2009, revenues stood at $2.0 billion, declining to $1.7 billion in 2013, and coming in at $631 million, for the period ended September 30, 2014. (Source: SEC F-1 Filing, last accessed May 19, 2015.)
Debt balances associated with Black Knight’s business have been relatively stable since 2009, but rose sharply from 2013 to 2014. Total debt, current and long-term, jumped from $1.0 billion in 2013 to north of $2.0 billion as of 2014 year-end. On a more positive note, Black Knight has paid a stable cash dividend of $0.40 per share since 2009, with the exception of 2014.
Performance to-date hasn’t been stellar, but management sees financial performance reversing course.
As of its latest annual report, Fidelity National Financial had high hopes for Black Knight. It set out a 10% revenue-growth target going into 2015, and an operating earnings margin in the 40% range. According to management, the sales pipeline was strong and financial results were as planned, as of the last quarter of 2014. (Source: FNV 2014 Annual Report, last accessed May 19, 2015.)
The Black Knight IPO is likely to be well-received by investors if they expect management guidance to be accurate. However, in its most recent period, Black Knight generated $632 million in revenues, but booked a net loss of $118 million.
The Black Knight IPO will ride the wave of an improved housing market. U.S. 30-year mortgage rates stand at all-time lows: 3.67% as of April 2015. New and existing home sales have rebounded 68% and 50%, respectively, from their post-recession lows. (Source: Federal Reserve Bank of St. Louis, last accessed May 19, 2015.)
With macro tailwinds powering the sales of Black Knight’s IPO, all eyes will be on management to hit financial targets, reversing current losses. This will justify one of the biggest IPOs of 2015.