Citi has initiated coverage on MOC and AFG with a Buy rating on both.
See report below in The Australian today.
******************************************************************************* Mortgage brokers poised to seize market share
Mortgage brokers should get an increasing share of a recovering home loan market, according to Citi.
The US investment bank has initiated research coverage of Australian mortgage brokers this week, with “buy” ratings on Australian Finance Group and Mortgage Choice.
Citi analyst Brendan Sproules said the sector had bounced back from the “existential threat” of the Hayne royal commission and had been growing since the last federal election in May 2019.
Despite a slowdown in property prices and mortgage lending, borrowers have increasingly sought mortgage brokers, while the increased focus on banks’ responsible lending obligations has increased recognition of the value of mortgage broking services for home loans.
Mr Sproules notes that uncertainty in the interpretation of responsible lending obligations has eased since the conclusion of a Federal Court case in June 2020.
At the same time, borrowers’ debt capacity has increased after falling sharply during the royal commission, and new record-low mortgage rates this year have piqued borrower interest.
While noting lower net migration due to the COVID-19 pandemic as a short-term drag, Mr Sproules points to favourable long-term demographics, including strong population growth and trends toward home ownership with a mortgage and renting from private landlords as factors that he expects to fuel 7 per cent growth per annum in new home finance commitments.
“Over the next 10 years, we expect there will be a boom in households aged 35-54, the key demographic for ‘house with a mortgage’ demand,” Mr Sproules said. “This demand will be met by the downsizing of the ageing ‘Baby Boomer’ population.”
And mortgage brokers are expected to increase their market share to 60 per cent of new housing finance as the lenders’ branch-centric distribution is no longer aligned to consumer preferences.
“One of the major areas of cost reduction for a revenue-constrained sector is the transformation of branch networks, to the benefit of independent mortgage brokers,” Mr Sproules said.
“Mortgage brokers’ growing strength is set to be better monetised and they increase revenue through the shift to increasingly fund own-branded mortgages through securitisation.”
Australian Finance Group (AFG) is Mr Sproules’ preferred stock in the sector, as after a pending consolidation with the No 1 player, it looks set to control 40 per cent of the mortgage broking industry.
“We believe AFG is the best placed in the sector to monetise its distribution to achieve 15 per cent of lodgements with 50 per cent funded through residential mortgage backed securities,” he said.
In his view the recent reshaping of the franchise business model has put AFG in a better place to exploit a strong consumer-facing brand in a growing market for brokers.
While AFG was trading on an attractive price-to-earnings multiple of 11 times and a dividend yield of 6 per cent, Mortgage Choice’s valuation “remains compelling despite strategic execution risks”, Mr Sproules said.
“The dividend yield of about 7 per cent provides valuation support while the last leg of its restructuring phase is yet to be executed,” he said. DAVID ROGERS
MARKETS EDITOR
MOC Price at posting:
$1.10 Sentiment: Buy Disclosure: Held
