Homeloans flounders until real housing growth appears

Other lenders and brokers are in the same boat.

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published September 2, 2013 7:35 am AEST

Homeloans (ASX: HOM) is a residential mortgage origination and management company stuck in a revenue and profit range over the past four years since the GFC.

The financial statements show a total revenue of $59.77 million, deriving from interest, fees and commission income. That is down from $64.7 million previously. Profit was down from $8.11 million to $7.74 million or 4.6%.

The profit result includes a $1 million after-tax profit from the proceeds of the sale of the company's investment in National Mortgage Brokers.

Return on equity has been in the high teens for a number of years, and this year also came in at 17.9%.

Its lending volumes were up by 11.4%, and settlement volumes increased by 13.5% compared to the second half of 2012. There was a slight decrease in total funds under administration from $7.8 billion to $7.7 billion. Still, the company stated that the annual results reflected the underlying value of its ongoing annuity stream of income during a time of subdued housing credit growth and strong competition.

Other mortgage originators and brokers like Yellow Brick Road (ASX: YBR), RHG (ASX: RHG) and Mortgage Choice (ASX: MOC) have all experienced falls in net profit as they wait for the next housing boom to arrive. The recent interest rate cuts — creating the lowest rates since the 1960s — have proven to be not enough to spur economic growth yet. Consumer sentiment is being weighed down over short-term concern as to which direction the Australian economy will take.

The company's chairman, Tim Holmes, said that the result of this has been "… aggressive discounting of both establishment fees and headline rates, not to mention adjustment of commission rates and structures to attract business."

Homeloans declared a final dividend of 3 cents per share fully franked, similar to the interim dividend, for a total of 6 cps.

Foolish takeaway

The market seems poised on an edge to turn upwards, so now is the time for investors to coldly assess the prospects of the companies and industries they have knowledge in, and take advantage of this lull in growth. Look for secular growth until the business cycle moves into the next phase.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

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