BUY HOLD SELL – Australian Finance Group (ASX: AFG)
Accommodative monetary policy in the face of the pandemic has given many economies much-needed support, and Australia is no exception. We have fared relatively well throughout the crisis and many Aussies, especially from younger demographics, have continued to embrace housing. Last Friday the ABS released its monthly home loan report which showed a record jump in the value of loans, up 12.6% in August. The number of first home buyers jumped significantly as well, marking an almost 11 year high. It means that more homes will be built and more newly erected and established homes will be purchased. On Wednesday this week, AFG reported residential loan lodgments in the September quarter of more than 35,400, with a volume greater than $18bn. The numbers eclipsed last quarter’s record-breaking levels. CEO David Bailey noting that the surge was driven by an uptick in First Home Buyers. It is clear that this isn’t a typical recession. Home loan records aren’t broken in a typical recession. These numbers speak to an underlying confidence in the economic outlook and present the argument that many young Australians have a degree of job security and a relatively high level of savings, catalyzed by lockdown restrictions, which brings me to look at mortgage broking company, Australian Finance Group (ASX: AFG). In August 2019 AFG announced its intention to merge with mortgage aggregator Connective Group Pty Ltd. AFG received word in June the ACCC would not oppose the $120m merger and is now awaiting the decision of the court. In May, it strengthened its balance sheet raising $60m, which was well received by shareholders. For the year ended 30 June 2020 the Group recorded a net profit after tax of $38m, 15.3% above FY19. The increase in profit was attributable to AFG Securities loan book growth of 41.3% to $2.91bn. Combined residential and commercial loan book growth of 5% to $163bn. AFG home loans trail book up 14% to $10.5bn. Management adding the pipeline of business currently remains strong. The shift away from the big four banks, following the Banking Royal Commission, has also benefited the company. Back in September 2019 UBS released a report that highlighted the popularity of commission-paid mortgage brokers, leading the major lenders to question their mortgage broking future. Their share of mortgages sold through branches plummeting, down ~33% in four years as they mull the decision. AFG securities also completed its inaugural $500m residential mortgage backed securities issue earlier in the week. Which was upsized from $350m following strong support. Main observations:
- ROE excellent at 22.3% and expected to improve slightly in FY2 and FY3.
- EPS growth forecast to take a hit this year and recover in FY2. Revenue growth likely to increase in FY2. FY3 has brokers expecting a significant fall in revenue. It should be said that the further out the forecast, the less accurate it is.
- A PE of 16.2x is relatively cheap and anticipated to fall to 12x in FY3.
- A yield of 5.8%, which is poised to improve to 6.8% in FY2 is also impressive.
- 80% of the brokers surveyed by Thomson Reuters have a buy or strong buy recommendation.
- It is trading 2.3% ahead of the average broker target and 33% above intrinsic value.