Compass Point Cuts Price Target on Altisource Residential (RESI) to $14; Reiterates Buy
Compass Point maintained a Buy rating on Altisource Residential (NYSE: RESI), and cut the price target to $14.00 (from $17.00), following the company's 4Q. RESI reported a 4Q15 GAAP EPS loss of -$1.18 on revenue of $24.1M. Management also announced the sale of 1,266 additional NPLs with UPB of $434M at a price close to RESI's carrying value.
Analyst Fred Small commented, "We reiterate our BUY rating on RESI and cut our price target from $17.00 to $14.00, representing upside of +49% and a total return of +57% including our FY16 dividend estimate of $1.50. Our valuation is based on a weighted-average of our dividend discount model (DDM) valuation (~ $14.00), downside of book value with estimated assets at cost plus additional impairments (~$11.75), and upside of 80% of stated book value ($16.50). After wading through another ASPS infomercial, we conclude that RESI shares remain significantly undervalued. Even assuming all RESI ever did was purchase assets and destroy value (i.e., valuing the current assets at cost less a discount for value impairment), our valuation implies over +25% upside. Clearly the market is discounting further value destruction from here based on continued asset purchases. Would we prefer a different strategy? YES. Do management's conflicts of interest with respect to AAMC and ASPS risk further impairing shareholder value? YES. We thought that maybe, following a tumultuous 2H14 and FY15, surprises about how irresponsibly RESI's assets have been managed would cease, but we were wrong. The 10-K provides new disclosure about material weaknesses related to RESI's reported asset values and calls into question the business practices at the vendor who provided to RESI's broker price opinions. The biggest risks to our investment thesis are: 1) the asset base is still shifting from NPLs to single-family rentals (SFR) and the FY17 dividend will be lower than FY16, 2) incentives remain misaligned due to RESI's external management structure and incentive payment agreements, and 3) NPL sales could take longer than expected or occur at lower than expected prices, leaving RESI with less cash for reinvestment after paying down debt."
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Shares of Altisource Residential closed at $9.38 yesterday.