RHG (ASX) what is the downside?

Hi ppl,

just wanted to get some discussion going....

Rhg does not write new loans. It is just a loan portfolio that is slowly winding
down as loans finish and people refinance their loans elsewhere (paying exit fees).

- Net profit: 2008 - 124m, 2009 - 120m, 2010 - 94m
- value of loan book: 2008 - 11.6bn, 2009 - 7.7bn, 2010 - 5bn
- current balance sheet shows 465mil in cash, net assets of 308mil

market cap of company is 217m

Every loan it makes has mortgage insurance. They diversify across mortgage insurers. There is next to no risk in the aussie homeloans industry in terms of default, and even if there is mortgage insurance would cover it. They borrow a fair amount of short term debt like 3 month bank bills and the risk for them is that lending dries up like it did for subprime and they would not be able to service their 'riskless' loans. The reason the company is so profitable is because they dont pass on all the rate cuts
and increase rates by more than the rba does. Hence the interest margin is excellent. Unethical but perfectly legal as people can leave rhg if they want.

In time the mortgage book will become too small and will no longer be profitable. When This happens, the loan book will be sold and that will be the end of the company.

Why is it trading so low? The company has NEVER paid a dividend. It could now pay a dividend of more than the current share price, and that is without considering the
franking credits. So +30% gain. The reason being as stated in the financial report -

'Given the continued uncertainty of warehouse funding and markets in general and the further potential need to support some warehouses with credit enhancement in the form of cash collateral the directors do not recommend the payment of a dividend in respect of this financial year (2009: $nil). As advised at the Annual General Meeting
held on 12 November 2009 the directors policy is to maximize cash reserves to be able to take advantage of an investment opportunity should it arise. If by 2011 the Company has not identified what it believes to be a superior investment opportunity then your directors intend to distribute the Companys available funds to shareholders in an optimal manner.'

Another risk is that co founder and director Greg Jones has recently sold 65million of his 80million shares. This is not what you would like to see from someone who knows
the company so well. It might go to show that the company has no intentions of paying dividends and he does not share the view of the company and its 'acquisition ideas'.

pure ramblings dyor,

opinions? It seems like a good punt?