Colliers: Look beyond the headline mistake and focus on acquisitions (NASDAQ:CIGI)

My Rating Buy for Colliers International Group Inc. (NASDAQ:CIGI) (TSX:CIGI:CA) the stock level remains unchanged.

CIGI’s EPS failure is not a cause for concern as it relates to a non-operating factor, namely foreign exchange. Investors should focus on Colliers instead International’s acquisition of Englobe Corporation’s engineering business, which brings a lot of positives. CIGI’s outlook for fiscal 2024 has become more favorable with this M&A transaction and I think Colliers International could achieve a higher P/E multiple.

I previously wrote about Colliers International’s financial results for the first quarter of this year in my May 5, 2024 update. In this article, my focus is on CIGI’s financial results for the second quarter of 2024 and the company’s latest inorganic growth initiative.

Q2 earnings would be in line with expectations if the impact of currency changes were taken into account

CIGI has revealed the company’s latest second-quarter results results from press release published on August 1, 2024

Colliers International’s Non-GAAP adjusted earnings per share, or EPS, rose +4% year-over-year to $1.36 in Q2 2024. At first glance, it would appear that CIGI’s actual Q2 normalized earnings per share fell short of analysts’ consensus forecasts of $1.37 per share.

However, CIGI indicated in its Q2 2024 report that the company’s “adjusted earnings per share in the second quarter would have been approximately $0.01 higher, excluding the impact of foreign exchange rates.” In other words, Colliers International’s second-quarter net income would have met market expectations when non-operating factors such as foreign exchange rates are taken into account, adding $0.01 to CIGI’s earnings per share of $1.36.

In fact, the company’s other two key operating metrics performed better than the sell-side had previously anticipated.

CIGI’s revenue increased +6% year-over-year to $1,139.4 million in Q2 2024. This was +3% above the market consensus estimate of $1,111.3 million in revenue (source: S&P Capital IQ).

Additionally, Colliers International’s normalized EBITDA rose +6% year over year to $155.6 million in the latest quarter. This represented a +5% beat on the sell-side consensus estimate of $148.4 million, according to S&P Capital IQ data.

In my opinion, the second quarter of 2024 went in line with CIGI expectations.

In my May 2024 report, I cited earlier commentary from CIGI management indicating that “the execution of ‘work in progress’ backlogs in the Outsourcing and Consulting segment” and “a ‘modest rebound’ in the Capital Markets segment” would support the company’s results in 2024.

Colliers International has recorded year-over-year revenue declines for seven consecutive quarters, from Q3 2022 to Q1 2024. Q2 2024 marks a turning point for CIGI’s Capital Markets segment (accounting for 16% of Q2 revenues), as the segment achieved positive year-over-year revenue growth of +1% in constant currency in the last quarter.

On the other hand, CIGI’s Outsourcing & Advisory segment, the company’s largest business unit accounting for 48% of Q2 revenues, reported a decent year-on-year revenue growth of +5% in local currency terms in Q2 2024. As mentioned above, Colliers International’s Outsourcing & Advisory segment benefits from a “work in progress” backlog, meaning that the division’s revenues are highly predictable.

In summary, Colliers International’s financial results did not disappoint the market. The company’s Q2 financial result adjusted for currency effects would be in line with expectations, while Q2 revenue and EBITDA were above consensus forecasts.

Looking ahead, the outlook for CIGI is favorable, given the stability of Outsourcing & Advisory segment revenues and the recovery of the Capital Markets segment. It is also worth noting that Colliers International’s full-year fiscal 2024 outlook has been strengthened by a recent M&A transaction, as detailed in the next section.

The latest M&A transaction has many advantages

Two days before it announces its second-quarter 2024 results, Colliers International revealed in a press release that it has completed “the acquisition of a controlling interest in Englobe Corporation, a leading Canadian multidisciplinary engineering, environmental and inspection services firm.”

Brief Description of the Acquisition of Englobe Corporation

CIGI’s latest inorganic growth initiative has yielded a number of positive findings.

First, the quality of Colliers International’s earnings improved with the acquisition of Englobe Corporation.

A key indicator of earnings quality is the share of recurring income in total earnings. In its Q2 2024 earnings presentation, CIGI revealed that its contribution to trailing twelve-month recurring earnings would have increased from 70% to 72% on a pro forma basis, including the impact of the Englobe Corporation acquisition.

Second, the company’s overall profitability could improve by expanding its engineering and project management activities.

Smaller-scale businesses tend to weigh on the overall profitability of a company due to negative operating leverage. CIGI’s engineering and project management business expanded by about one-third with the recent M&A transaction. This assumes Englobe Corporation’s revenues in 2023 of $340 million and a pro forma contribution to CIGI’s engineering and project management business (including Englobe) of about $1.3 billion. In other words, Colliers International’s engineering and project management business operating margin is likely to improve going forward due to positive operating leverage driven by the larger revenue base.

Third, CIGI’s growth outlook for the current year has been made more favorable by a recent M&A transaction.

Colliers International’s updated fiscal year 2024 financial forecasts

As per the chart above, the company now expects faster growth in revenue, EBITDA and net profit in full-year fiscal 2024, taking into account the acquisition of Englobe Corporation.

Based on the midpoint of CIGI’s net expansion forecast (+16%), Colliers International’s projected P/E for fiscal 2024 is 22.0 times, which I consider attractive. For comparison, the current consensus estimates for Colliers International’s ROE for fiscal 2024 and 2025 are 26.3% and 25.5%, respectively (source: S&P Capital IQ). In my view, CIGI deserves a P/E multiple consistent with its ROE multiples, implying that the stock has the potential to trade at a P/E multiple in the mid to high 20s.

Risks to consider

I have identified two risk factors for CIGI.

A key risk is that Colliers International’s Capital Markets segment will not maintain positive revenue growth in future quarters due to unfavourable market conditions.

Another major risk is that CIGI will not properly integrate its recently acquired Englobe Corporation.

Final Thoughts

Colliers International’s financial results in Q2 2024 were solid, with the net profit adjusted for exchange rate effects meeting market expectations. CIGI’s full-year growth outlook was strengthened by the M&A transaction involving Englobe Corporation. Given the company’s favorable results and prospects, I maintain a Buy rating for Colliers International.