One of Yellow Brick Road Holdings Ltd's (ASX: YBR) primary selling points is that it offers better deals than the big banks – despite being part-owned by Macquarie Group Ltd (ASX: MQG). So it's pleasing to see the company develop new products that will see it expand its competitive offering compared to the big banks.
The company released its fourth quarter results to the market this morning, which were acceptable but not inspiring:
- Settlements were up 5% compared to the prior corresponding period ("PCP"; i.e., fourth quarter 2015) due to a slowdown in offshore borrowing, plus continued tight investment lending conditions
- Mortgage book grew 23% to $37.8 billion* compared to PCP
- Funds under management rose 5% to $703 million compared to PCP, effectively flat compared to third quarter 2016
- Increase in marketing spending lead to a 33% increase in applications in the pipeline**
- Q4 receipts from customers effectively flat at 25% of the full year's receipts
- Positive operating cash flow of $0.7 million for the quarter, outflows of $2.4 million for the year
- $6.8 million cash on hand plus $3.7 million undrawn loans
*Yellow Brick Road has previously said it would like to have a $100 billion mortgage book by 2020… which it might struggle to achieve
**Yellow Brick Road has $3 million in media spend that won't be paid until 2017, which could hit its cash flows
So What?
On the whole it looks as though tougher market conditions have held back Yellow Brick Road's growth, despite its market-leading 3.82% interest rate on home loans. Additionally, the wealth management business has stagnated which is not ideal – this is an important area of growth, according to management. The company has recently begun an organisational restructure to increase the focus on wealth management.
On the plus side, Yellow Brick Road experienced a 55% increase in 'leads', including unsolicited branch walk-ins, as well as a 33% uplift in its application pipeline compared to the same quarter last year. Not only does this bode well for growth in the near future, it also suggests YBR is good at converting leads into applicants.
New products like the 'Agility' range in particular broaden the company's offering by relaxing some of the inflexible lending rules applied by institutions. An example given to me by an acquaintance at YBR was that some clients now won't have to save their own cash for a deposit, it could be 100% a gift from parents. Unlikely to revolutionise the company's lending activity, it's nevertheless pleasing to see the company again go one better than the banks.
Now What?
Yellow Brick Road continues to spend big on marketing up front in order to generate leads and applications further down the road. The expenses continue to take up a fair chunk of the company's cash and ultimately YBR must scale up further in order for its sales to cover its outgoings. This is why a tighter lending market (although not unexpected) and slower wealth growth are a bit disappointing.
With $11 million of funding available the company has enough for another three years or so at current cash burn rates, but acquisitions and increased advertising could eat through this fairly quickly. At 20 cents per share Yellow Brick Road isn't expensive, but it could take a couple of years for the company to really gain traction.
