MOC – Mortgage Choice Limited

Are we spoilt for choice?
Mortgage Choice Limited ‘Mortgage Choice’ was established in 1992 and has built a national network of mortgage brokers servicing local communities.

Mortgage Choice’s network of mortgage brokers has sourced more than 300,000 loans for clients since inception. It provides loan advice, personal and commercial loans, asset finance and risk insurance products offered by Australia’s lending institutions.

Mortgage Choice works in each customer’s interests to source a loan that suits their individual needs.

Is this business easy to understand?
The Mortgage Choice business is easy to understand. Mortgage Choice has access to a panel of lenders. Mortgage Choice help their clients navigate the maze of home loan options available and narrow down a client’s choice of loan to a small number of loans and lenders that will suit the client’s needs. Mortgage Choice does not charge their customers directly for service. Instead, they receive an upfront commission from the lender for arranging the loan and income in the form of trailing commissions each year thereafter. Mortgage Choice pay their franchisee the same rates regardless of the loan, which means that franchisees work in each customer’s interest to source a loan that suits their individual needs.

Does this business have a sustainable competitive advantage?
Mortgage Choice’s advantages lie in the convenience and choice they provide their clients. Mortgage Choice use in house software tools to simplify the loan choices for clients depending on each client’s individual circumstance.

Mortgage Choice currently write about 4% of Australia’s home loans. The opportunity for Mortgage Choice is to grow market share. If Mortgage Choice took just 1% market share collectively off the big four banks, thereby increasing their market share from 4% to 5%, it stands to reason that Mortgage Choice earnings would increase by 25%.

What are the risks facing this business?
One risk includes a cut to the existing commission structure which would reduce earnings for the business. Another is the specific risk Mortgage Choice has in being tied to the domestic housing market. This company’s performance is largely linked to fluctuations in house prices and volume of home sales across the country.

Mortgage Choice is working on five key drivers for their business under their ‘DREAM’ acronym, with the ‘D’ in DREAM standing for Diversification of their revenue streams. The company is aware of the specific risk it faces by being tied to the domestic housing market and it is taking steps to minimize this risk by creating new revenue streams.

Is it run by able and trustworthy management?
Yes, I believe so. The current Chairman Peter Ritchie and CEO Michael Russell are both experienced operators and appear to have an entrepreneurial mindset in running their business. Management has maintained a strong balance sheet with cash in the bank and the ability to fund future growth opportunities easily. Mortgage Choice has a history of producing excellent results with return on equity above 20% per annum for each of the last 8 years in a row.

Is it trading at a bargain price?
Mortgage Choice’s (ASX: MOC) share price closed at $1.44 on Friday, 3 February 2012 which is right on my current estimate of intrinsic value. Mortgage Choice paid fully franked dividends of 13 cents last year which equates to about a 9% dividend yield with franking credits on top.

*Please note that this estimate of intrinsic value is subject to change on a daily/weekly basis.

In summary, Mortgage Choice is an excellent business with strong profitability, excellent cash flow, cash in the bank and reliable management. It is trading at about my estimate of intrinsic value, with the company having the ability to currently return pretty much all cash earnings to shareholders as dividends.

Mortgage Choice has a history of producing excellent results, with return on equity above 20% per annum for each of the last 8 years in a row. While looking in the rear view mirror is not going to help future investment returns, this business is in a great position to continue producing great results for shareholders. I will be looking forward to their half year results announcement coming out in the next couple of weeks to get another guide on what the forward view out the windscreen looks like.

This article is published by Dean Mico.
Disclosure: Dean Mico does own shares in Mortgage Choice.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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