Australia | Jan 09 2007
By Chris Shaw
Only one can be the first and this year the title of first initiation of coverage by a leading market expert goes to Mortgage Choice (MOC). Thanks to ABN Amro.
Yesterday’s Australian housing data for November was slightly better than the market had expected, putting the sector in something of a more positive light as 2007 begins. For investors the choice is usually one of a building materials company for exposure to the construction side of the housing market or a bank for its role in financing activity, but ABN Amro is attracted to Mortgage Choice as an alternative play in the sector.
The company has about 4.8% of the Australian mortgage market through its franchise network of more than 600 mortgage brokers, with a total loan book of more than $25 billion as at June 30 last year, an amount 18% higher than at the same time in 2005.
The broker suggests a couple of reasons why investors should be attracted to the stock, as for one it offers a GDP + growth story in that the mortgage market grows in line with the broader economy and the company is gaining market share as it expands its operations.
This growth is expected to continue as the broker notes the Australian market remains somewhat immature, with currently around 45% of loans sourced through brokers compared to around 65% of loans in the UK market. Management appears intent on taking advantage of this growth as the broker notes there are plans in place to increase franchise numbers by a further 5.9% in the current financial year.
This feeds into another attraction of the company, as the broker notes it has a low level of fixed costs so any increase in revenue in large part drops straight through to the bottom line. On the broker’s estimates the company’s cost to income ratio should fall to 18.5% in FY07, supporting its strategy of paying out a large portion of its earnings as dividends. The payout ratio currently stands at 90-100% of earnings.
Of some concern is the company’s exposure to the New South Wales market, where it is overweight and where housing has underperformed the other states. There is potential for some good news here though, as with a state election due in the first half of the year the broker sees the possibility of a stimulus package as part of any election promise.
Management is targeting annual earnings per share (EPS) growth of 10%, an outcome the broker sees as achievable given it is forecasting EPS growth of 13%, 12.8% and 11.4% in the current and coming financial years. Supporting this is system growth in the sector of an average of 14.7% over the past 30 years.
The broker’s earnings per share estimates are 14.1c in FY07, 15.9c in FY08 and 17.7c in FY09, while Thomson One Analytics shows median estimates of 15c, 17c and 19c respectively.
Given the growth outlook the broker has initiated coverage on the stock with a Buy rating and a target price of $3.15, which is pitched at 22x earnings. It sees this as reasonable given the company’s dividend yield, which was just over 5% in FY06 and represents a premium to the small industrial sector.
Overall, the FN Arena database shows the stock is rated as Buy twice, Hold three times and Underperform once, with an average price target of $2.87. Thomson One shows a median price target of $2.80.
Shares in Mortgage Choice today are higher in line with the stronger market overall, as at 10.45am the stock was up 6c at $2.93, which compares to a range over the past year of $1.55-$2.95.