Zeus Capital Research Director Robin Savage caught up with DirectorsTalk to discuss Mortgage Advice Bureau (Holdings) PLC (LON:MAB1)
Q1: Now, Mortgage Advice Bureau has just announced the completion of a new joint venture agreement with an Australian mortgage broker, Mortgageport. How material is this this investment to the group?
A1: Well in my opinion this joint venture has potential to create significant shareholder value for MAB shareholders whilst requiring an immaterial quantum of investment. The returns on investment of networking businesses like Mortgage Advice Bureau are extremely high and this is because the capital requirements are low, the joint venture will leverage the joint venture partners ‘local expertise and the returns to the joint venture are a function of the flow of business introduced by the introducers like Purplebricks Group Plc (LON:PURP). So whilst the investment is only £0.3 million in the first year, and this is immaterial to the group, the potential returns in future years will reflect the joint venture’s ability to secure an increase in flow of new business as the years develop.
Q2: How can Mortgage Advice Bureau shareholders monitor progress being made in their Australian joint venture?
A2: The MAB share of the joint venture result will be included within the share of profits from associates and other investment and therefore you may not see the individual returns or the increased revenues that are being generated by the joint venture. Overall, the joint venture will be probably immaterial in the context of the group at least in the early years so the investors will need to look carefully at the management’s commentary and the disclosures in the investor presentation which will show progress over time. So I think investors are going to have to look carefully for the progress which will be in commentary and presentation.
Q3: So the impact on the group’s cash resources and short-term forecasts it’s likely to be immaterial but how big is the opportunity and the potential shareholder value creation?
A3: Well to try and understand that you’d have to look at the size of the Australian residential property market. There’s no doubt just like in the UK that residential property is one of the most value asset classes in the economy, it’s estimated to be worth over 5 trillion Australian dollars compared to GDP, that’s the Gross Domestic Product, of Australia of 1.5 trillion. The value of the residential property is over 5 trillion and the outstanding mortgages on those property is around about 1.3/1.4 trillion which is approximately 25% of the overall property market value. By the way, bear in mind the Australian dollar is about 1.6 at the moment to pounds, over the last 5-10 years it’s more like 2 to £1 and if you were to look generally at the size of the Australian property market it’s about half the size of the UK’s, partly because they’ve about half the number of people.
If we looked at the opportunity for this joint venture I think we can see that potentially it could be similar sort of size to Mortgage Advice Bureau itself and I see this particular joint venture as creating, in the medium-term, an opportunity where Mortgage Advice Bureau can both use its UK best practice to help build the Australian business and then use the new best practice being developed in Australia to help the development of the UK business. So I think that short-term the shareholder value creation will be difficult to identify but over the medium-term, by that I mean over the 5-10 year period, I think this is going to be a really important investment for shareholders at Mortgage Advice Bureau.
