Australia | Aug 24 2009
By Chris Shaw
While Mortgage Choice’s full year earnings ((MOC)) fell a little short of Bank of America Merrill Lynch’s numbers, which the broker admits were at the top of the market, it points out management has for the first time offered guidance on the earnings outlook for FY10. BA-ML sees this guidance as well above market expectations.
Previously, the broker notes, while it had expected earnings growth in FY10, the market consensus had been for earnings to decline compared to FY09, so guidance of some growth in earnings is an outcome likely to cause some increases to forecasts across the market. It had the desired impact on UBS as post the result and release of guidance, the broker has increased its net profit forecast in FY10 by 17%, followed by a 14% increase to its FY11 numbers.
In earnings per share terms the changes see the broker forecasting 11c in FY10 and 13c in FY11, which is still well below Bank of America Merrill Lynch’s forecasts of 14.8c and 15.9c respectively, the former being lowered slightly post the result. RBS Australia lifted its estimates by around 7% post the earnings announcement and it is now forecasting EPS of 12c and 10.9c over the next two years, while consensus forecasts according to the FNArena database are 11.3c and 11.5c respectively.
Supporting the changes to forecasts across the market is the fact the company remains highly leveraged to the recovery in housing approvals currently underway, which leads Bank of America Merrill Lynch to suggest the earnings outlook for the company’s core business is improving.
There is also scope for upside from other areas in the broker’s view, as the business could extend its sales performance into non-mortgage products such as leasing and insurance, while BA-ML also points out the overall expense base of the group continues to improve and this has positive implications for margins.
As well, UBS points to potential merger and acquisition opportunities for the company going forward, while it too sees scope for cross-selling across the client range as a possible source of some earnings upside. RBS agrees, also pointing to higher up-front commissions as a way the company could surprise on the upside with respect to earnings.
Post the result it was left to Deutsche Bank to point out potential negatives, the broker suggesting the high level of gearing in the consumer sector makes the mortgage market in the near-term something of a risky proposition. So while it notes the company has no debt and so should be able to withstand tough market conditions, there is enough cause for concern to stop the broker turning too positive on the stock.
Given this view, Deutsche Bank has retained its Hold rating post the profit result, matching the recommendation of RBS Australia, which downgraded to a Hold after the result given recent share price gains. In contrast, both UBS and Bank of America Merrill Lynch have retained their Buy ratings, with both lifting their price targets in the process.
Both brokers see the potential for upside earnings surprise and the current 9% dividend yield the company offers as justification for a Buy rating, particularly as UBS estimates the shares are currently trading on an earnings multiple of just 11x FY10 earnings.
Post the company’s profit result, the FNArena database shows a total of two Buys and two Holds, with the average price target now $1.37 against $1.10 previously. Shares in Mortgage Choice today are slightly higher and as at 12.00pm the stock was up 1c at $1.24. Over the past year the stock has traded between $0.65 and $1.30.