EUR 850.00 For Business Accounts Only

Morningstar | Mortgage Choice Receives a Boost from Federal Election Result. FVE AUD 1.10 Unchanged

The earnings outlook for no-moat Mortgage Choice has improved following the recent federal election result with the removal of a raft of political and structural issues. In our view, Labor’s policy platform included a wide range of direct and indirect negatives for the mortgage broker sector, but Labor’s electoral loss swept aside these headwinds, and opens up the possibility of better times ahead for the struggling Mortgage Choice. The Liberal/National Coalition has a more sensible position on broker remuneration, backing away from the Draconian Royal Commission recommendation to force brokers to charge borrowers upfront fees that would replace the current structure of lenders paying the brokers. The election result clears the air somewhat for mortgage broker remuneration, with the upfront and trail commission structure retained.

It is very early days, but the electoral outcome appears to have been well received by the residential property sector and combined with other initiatives, gives some hope for a stabilisation in property prices. In addition to the residential property-friendly political outcome, APRA announced potential changes to mortgage serviceability benchmarks, and the Reserve Bank of Australia indicating possible near-term interest rate easing.

Despite the uncertainty around the timing of the housing recovery, the last week or so is a clear positive for Mortgage Choice with the stock price up 43% since just before the election. Despite the post-election hype, the property market is still soft and tough lending underwriting standards continue to crimp the flow of housing credit. It is too early to adjust up our volume growth forecasts for Mortgage Choice and we will be watching future ABS housing finance approval data for signs of a recovery in the home loan market. Following the significant rebound in the stock price since the election, the stock is fairly valued trading broadly in line with our AUD 1.10 per share fair value estimate.

The stock price had been under considerable pressure during the previous 18 months due to Mortgage Choice broker remuneration model changes, a weaker property market, tougher bank lending standards and the not inconsiderable fallout from the Royal Commission.

We expect a modest recovery in demand for housing and business credit with an earlier than expected end to the housing downturn. But it will take at least six-12 months before there is clear evidence of growth in the housing market.

Despite overwhelming negativity endured by the firm for the past 18 months, we expect a period of stability as senior management bed down recent changes in the business. We are more confident in the long-term outlook for the embattled mortgage broker and can see upside to our forecasts if the housing market starts to recover. We are confident management action to restructure the remuneration model, invest in technology and brand, and reduce the cost base will deliver, assuming demand for housing credit stages some type of recovery.

We forecast cash NPAT of AUD 14 million for fiscal 2019 and total fully franked dividends of AUD 6.0 cents per share based on a historically low payout of 53%. At current prices, the stock is yielding 5.3% grossing to 7.6%. First-half cash operating expenses fell 6% on first-half fiscal 2018 and we expect the firm will deliver on its full-year fiscal 2019 target for a decline of 10% in cash operating expenses.

The new franchisee remuneration model, implemented in August 2018, will materially shift the allocation of net revenue from the firm with franchisees receiving a greater share of the revenue pie. Despite the short-term pain for shareholders, we see the model as fairer for franchisees and better for the long-term outlook for the firm. The upside from the new remuneration model is a stronger and more sustainable business model.