Mortgage Choice Limited (ASX: MOC) is an aggregator of mortgage broker franchises, directly benefiting from the housing boom that's gripped the Eastern seaboard of Australia. Mortgage Choice's 2016 full-year results revealed that although key suppliers like Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) face intense competition and industry-wide headwinds, the mortgage broking business remains in robust condition.
Why buy?
The reason for buying Mortgage Choice shares is its annuity-style revenue and capital light business model. As an aggregator of mortgage broking franchises, Mortgage Choice physically owns no store fronts nor provides its own financial products. This means it carries minimal balance sheet and funding risk.
As a master franchisor, Mortgage Choice only employs skeleton staff, with most franchisee's being self-employed/running their own business. This creates a culture of strongly aligned interests, boding well for long-term profitability.
Importantly, unlike most bank-owned mortgage brokers, Mortgage Choice is entirely independent. This allows it franchisees to connect clients with almost any leading financial institution, leveraging Mortgage Choice's Australia-wide network and purchasing power in the process, to deliver tangible benefits for its customers (through lower prices and high quality service). As such, franchisees have no conflicting interest other than to ensure their clients receive the best possible service. This cultivates an award winning, client-centric, business.
2016 results
Mortgage Choice franchisees make money through trailing and upfront commissions for brokering various financial products for clients (such as new loans, insurances and investment products). Mortgage Choice receives part of this commission for use of its financial services licence on top of royalty payments from its franchisees (for use of its brand name).
This makes Mortgage Choice a very stable business, with its results demonstrating this fact.
In Mortgage Choice's full-year results announced in August, management declared a whopping 10.7% growth in cash profit to $20.5 million. As at 30 June 2016, Mortgage Choice's total loan book sat at $51.7 billion, representing solid growth of 4.4% on the prior year.
The stellar results were driven by a record $12.2 billion in settlements during the year – a natural reflex of higher housing prices. Management shared the spoils with investors by upping the full-year dividend by 6.5% to 16.5 cents, fully-franked.
Outlook
Of course, the uptick in profitability coincides with a booming property market and record low-interest rates. Whilst I am aware that this will not continue indefinitely, Mortgage Choice appears to be well insulated against credit downturns through its push to become an integrated financial services company.
With revenue from funds under advice growing 19% to $332.1 million during the year, the culmination of advisory and wealth management services now represents 10.3% of total revenue, adding diversification to its traditional mortgage lending business.
I believe this makes Mortgage Choice more stable than ever.
Foolish takeaway
Irrespective of which way house prices go, I believe Mortgage Choice has laid solid foundations to ensure a sustainable future lies ahead of it. As Australia's premier independent mortgage broker, its strong brand reputation and deep industry ties should see the company continue to prosper in all credit cycles. The addition of wealth and financial advice services bodes well for growth against competitors like AMP Limited (ASX: AMP) and Countplus Ltd (ASX: CUP).
Accordingly, with its shares providing a robust fully-franked yield of 8% and trading on trailing price-earnings of 13x, long-term investors would be remiss to look past it at current prices.
