Bargains Bargains Bargains

[Value Hunter]

I have looked at Mortgage choice (MOC). To me there is something seriously wrong with the management or the business model. If you look at 5 years plus of results, their earnings have been bumpy going up and down a bit from year to year with no clear underlying trend. Also there market share has been relatively stable\flat in the 3 to 4% range. If they can't do better (I mean stronger and more consistent earnings growth and rising market share) than this in the biggest housing boom of all time, imagine how they will fare when the housing market is weak? If a cyclical stock cannot put in very strong results during a boom, that is a worrying sign.

 

[Knobby22]

I have looked at Mortgage choice (MOC). To me there is something seriously wrong with the management or the business model. If you look at 5 years plus of results, their earnings have been bumpy going up and down a bit from year to year with no clear underlying trend. Also there market share has been relatively stable\flat in the 3 to 4% range. If they can't do better (I mean stronger and more consistent earnings growth and rising market share) than this in the biggest housing boom of all time, imagine how they will fare when the housing market is weak? If a cyclical stock cannot put in very strong results during a boom, that is a worrying sign.

They are not affected by the boom in reality. They are effected by property changing hands. A crash would be quite good for them unlike the banks as they are not in any risk. It is not a cyclical stock. The previous management went into a lot of dubious schemes like the Help me choose one mentioned. The present management is a lot smarter. Don't you think its cheap on metrics alone?

 

[skc]

About 5 times under book value

Just to clarify... you are referring to MRM? It's unclear in your post as you quoted Mcgraph who mentioned only MOC and BBUS.

 

[luutzu]

Just to clarify... you are referring to MRM? It's unclear in your post as you quoted Mcgraph who mentioned only MOC and BBUS.

yea.

Current price is $0.31 or so. NTA around $1.70

 

[Value Hunter]

They are not affected by the boom in reality. They are effected by property changing hands. A crash would be quite good for them unlike the banks as they are not in any risk. It is not a cyclical stock. The previous management went into a lot of dubious schemes like the Help me choose one mentioned. The present management is a lot smarter. Don't you think its cheap on metrics alone?

Knobby, I disagree with your assertion. It is a cyclical stock. It is affected by the volume of new mortgages + re-financings in the economy. Mortgage debt has been increasing strongly every year for the past many years and we have record levels of mortgage debt in the economy. Mortgage debt keeps hitting record highs in Australia every year. Just take a look at this graph:

https://edge.alluremedia.com.au/uploads/businessinsider/2016/02/APRA-Mortgaga-Debt.jpg

The graph is slightly old (ends late 2015) but a newer graph would still be trending in the same direction.

When house prices go up mortgage debt usually goes up (and you could even argue as many do, that the rise in mortgage debt is actually in large part necessary/responsible for an increase in house prices). If you buy a house for $1 million AUD and borrow $800,000 to buy it and two years later after house prices have gone up you sell the house for $1.25 million. The next guy who buys it puts up a deposit of $250,000 and borrows $1 million AUD to buy the same house. Suddenly mortgage debt on the same property has gone up. If you do not believe that mortgage broking is a cyclical industry just go back and look at would happened to the revenues earnings and share prices of mortgage brokers in the U.S., Spain, Ireland, etc during the GFC.

Another factor is that when house prices are falling usually banks tighten their lending criteria which makes it harder for people to take out a loan even if they wanted to. This results in not only a decline in the level of mortgage debt, but also due to tighter lending standards, generally means applicants will need to disclose more information and loans will take longer to process leading to higher costs per mortgage written for mortgage brokers and banks.

I am actually astounded that anybody could claim that lower house prices would be good for mortgage brokers. Its the most ridiculous argument I have ever heard!

My final word on this is ask any mortgage broker if they prefer to work in an environment where house prices are rising or an environment where house prices are falling? They will all unequivocally tell you that rising house prices is better for their business.

 

[luutzu]

yea.

Current price is $0.31 or so. NTA around $1.70

dropped to $0.25 today.

interesting...

 

[Knobby22]

Knobby, I disagree with your assertion. It is a cyclical stock. It is affected by the volume of new mortgages + re-financings in the economy. Mortgage debt has been increasing strongly every year for the past many years and we have record levels of mortgage debt in the economy. Mortgage debt keeps hitting record highs in Australia every year. Just take a look at this graph:

https://edge.alluremedia.com.au/uploads/businessinsider/2016/02/APRA-Mortgaga-Debt.jpg

The graph is slightly old (ends late 2015) but a newer graph would still be trending in the same direction.

When house prices go up mortgage debt usually goes up (and you could even argue as many do, that the rise in mortgage debt is actually in large part necessary/responsible for an increase in house prices). If you buy a house for $1 million AUD and borrow $800,000 to buy it and two years later after house prices have gone up you sell the house for $1.25 million. The next guy who buys it puts up a deposit of $250,000 and borrows $1 million AUD to buy the same house. Suddenly mortgage debt on the same property has gone up. If you do not believe that mortgage broking is a cyclical industry just go back and look at would happened to the revenues earnings and share prices of mortgage brokers in the U.S., Spain, Ireland, etc during the GFC.

Another factor is that when house prices are falling usually banks tighten their lending criteria which makes it harder for people to take out a loan even if they wanted to. This results in not only a decline in the level of mortgage debt, but also due to tighter lending standards, generally means applicants will need to disclose more information and loans will take longer to process leading to higher costs per mortgage written for mortgage brokers and banks.

I am actually astounded that anybody could claim that lower house prices would be good for mortgage brokers. Its the most ridiculous argument I have ever heard!

My final word on this is ask any mortgage broker if they prefer to work in an environment where house prices are rising or an environment where house prices are falling? They will all unequivocally tell you that rising house prices is better for their business.

Hi Value Hunter
Good point regarding credit growth but I still essentially disagree.
There is a lot of money tied up in investor loans that would be sold during a downturn.
With the ingress of owner buyers this would create a huge turnover which would go directly to the Mortgage Brokers bottom line.

 

[Ves]

Re MOC: there's also an ASIC inquiry going on in the background regarding the remuneration structure of mortgage brokers.

One of the recommendations made in the Murray Review in 2014, if I understand correctly, was the abolishment of trailing commissions.

If ASIC decided to disallow trailing commissions would companies like MOC be able to successfully restructure their fees?

Also there's a trend in the last few years of borrowers going to mortgage brokers more and more. I think almost 50% of people use a mortgage broker now for new loan originations vs. around 40% 5-10 years ago (sorry this is from my own memory, look it up if you want confirmation).

Obviously if the trend continues great for MOC and other brokers, but mean reversion is also another risk and would obviously hit the top line.

 

[Ves]

I probably should also mention that investors in MOC would also need to keep a very close on the accounting practices used to calculate accounting profit in the Financial Statements.

Because of 'trailing commission' happens over a period of many years there is a need to forecast a) what trailing commission is likely to be received over the period of the loan, b) when this should be included as profit and c) if any reassessment is required of future trailing commissions on loans from previous years. They may also get clever and try to match expenses against the revenue stream...

It's interesting that CCP has also been mentioned in this thread. Because a similar amount of 'faith' is required with their accounting practices.

 

[Value Hunter]

I think Credit Corp Group (ASX code: CCP) is a bargain. They have a strong track record and good management. If you listen to an interview (live-wire) with the CEO Thomas Beregi late last year, he said that in the medium term (let's just assume 5 years) he expects the Australian core debt buying business to be 40-45% of total of group earnings, with the consumer lending and U.S. debt buying division making up the rest. Assuming that earnings will at least be maintained in the Australian debt buying division (if not increased) and given that it currently comprises the vast, vast majority of group earnings, that means he is implying that profit will at least double in the next 5 years. My own in depth research agrees with such an implication.

Given the top end of the current forecast for 2017 earnings ($1.16 per share), the stock is trading on a price ($16.71) to earnings ratio of under 15 times. This for a quality well managed company paying half its profit as a dividend and that will also double profit in the next 5 years.

 

[Knobby22]

I think Credit Corp Group (ASX code: CCP) is .

I agree. My third largest holding.

 

[skc]

yea.

Current price is $0.31 or so. NTA around $1.70

Current price 23c, NTA reduced to 87c on further write downs.

Interest coverage deteriorated to 0.9x... still has support of the lender and the fixed asset sale (at big discount to book) helps a bit.

 

[Knobby22]

I agree Ves. MOC has been a bit conservative with the trailing commissions. Buyers have tended to hold the properties longer than accounted for leading to windfalls when adjustments have been made.
If trailing commissions were disallowed then this would effect the stability of the earnings.

 

[craft]

Current price 23c, NTA reduced to 87c on further write downs.

Interest coverage deteriorated to 0.9x... still has support of the lender and the fixed asset sale (at big discount to book) helps a bit.

MMA looks concerning to me.

NTA if a reasonable % can be realised at fire sale prices may be of some comfort to debt holders and the assets are clearly being liquidated at their behest now.


The large discrepancy between market price and NTA would be an indication for me that the market does not think MMA can cover its cost of capital to maintain its current business structure on an economic basis and probably won’t see out this current cycles low - or by the skin of its teeth at the best and have basically nothing to rebuild from.


For me the equity would only be interesting with a conviction that vessel utilisation rates are near to swinging upwards because MMA is hugely leveraged to that macro.


Nothing’s a bargain unless you know how the payoff should manifest and can position for and wait for it to playout.

 

[luutzu]

Current price 23c, NTA reduced to 87c on further write downs.

Interest coverage deteriorated to 0.9x... still has support of the lender and the fixed asset sale (at big discount to book) helps a bit.

The bases and slipway sold for about $16.9M below 2016 book value. They've earned about $1M over past six months... so selling at some 22 to 25% below book.

I guess that's a better deal than if they were to raise equity at some 20 cents on a dollar. Would mean massive dilution to existing shareholders. 25% discount for the bases is better than 80% discount on entire company. And it does mean being able to meet its debt obligation by end of this financial year; managed to push remaining debt to sept. 2019.

Would have been nice to have kept at least one base in Australia, but yea... desperate times.

With oil on its way back and oilers needing to extract further afields to keep up with depletion; that and apparently they'd lose their license after certain years of not doing anything with it.

So MRM will survive the current thrashing. With dilution avoided, for now at least... Still reckon it's a bargain at some 30 cents of the written down dollar NTA.

 

[Value Hunter]

I forgot to mention that Credit Corp Group (CCP) is my largest holding. Its fair to disclose ones position in a stock when discussing it.

 

[skc]

So MRM will survive the current thrashing. With dilution avoided, for now at least... Still reckon it's a bargain at some 30 cents of the written down dollar NTA.

MRM is only surviving because of the grace of the lender. How do you work out the probability that such grace will continue?

MMA looks concerning to me.

NTA if a reasonable % can be realised at fire sale prices may be of some comfort to debt holders and the assets are clearly being liquidated at their behest now.

The large discrepancy between market price and NTA would be an indication for me that the market does not think MMA can cover its cost of capital to maintain its current business structure on an economic basis and probably won’t see out this current cycles low - or by the skin of its teeth at the best and have basically nothing to rebuild from.

For me the equity would only be interesting with a conviction that vessel utilisation rates are near to swinging upwards because MMA is hugely leveraged to that macro.

Nothing’s a bargain unless you know how the payoff should manifest and can position for and wait for it to playout.

I am actually surprised that MRM hasn't been folded by the lenders - there are enough PPE to pay back most of the debt you'd think. With negative cashflow and EBITDA<Interest, the longer this goes on the more lenders have to put in. Perhaps there are other considerations at play... often contracts have a change of control / solvency clause so appointment of administrator may mean the crew and boat are out of work (which makes selling them even more difficult).

Another theory is that... the industry needs some of its major player to die. It has built the capacity for $80-100+ oil plus the LNG boom - so unless some player dies, no players can survive / thrive. The lenders can take a long view and strategically wait for the weaker hands to fold for the benefits of everyone else. I don't know enough about the other players to know whether MRM is the stronger or weaker hand. But the equity holders probably don't have much to cheer about either way.

 

[luutzu]

MRM is only surviving because of the grace of the lender. How do you work out the probability that such grace will continue?



I am actually surprised that MRM hasn't been folded by the lenders - there are enough PPE to pay back most of the debt you'd think. With negative cashflow and EBITDA<Interest, the longer this goes on the more lenders have to put in. Perhaps there are other considerations at play... often contracts have a change of control / solvency clause so appointment of administrator may mean the crew and boat are out of work (which makes selling them even more difficult).

Another theory is that... the industry needs some of its major player to die. It has built the capacity for $80-100+ oil plus the LNG boom - so unless some player dies, no players can survive / thrive. The lenders can take a long view and strategically wait for the weaker hands to fold for the benefits of everyone else. I don't know enough about the other players to know whether MRM is the stronger or weaker hand. But the equity holders probably don't have much to cheer about either way.

They just agreed to one payment at end of this financial year; the rest of the repayments will be pushed back to sept. 2019. So the lenders are already giving that grace, 100%.

Of the $390M total debt, $200M are just MRM's normal capital structure, rolling debt facility - as part of its operation. So not all the $390M debt are of the kind where they'll bankrupt MRM if it can't pay up.

That leave the $190M... of which $45M will be paid, then there's the $55M so far in vessel sales. Most of that would go towards repayment... so that leaves about $100M MRM need to pay within two and a half year.

Not an impossible requirement as oil prices pick up, demand for their services that's to follow.

 

[skc]

They just agreed to one payment at end of this financial year; the rest of the repayments will be pushed back to sept. 2019. So the lenders are already giving that grace, 100%.

Of the $390M total debt, $200M are just MRM's normal capital structure, rolling debt facility - as part of its operation. So not all the $390M debt are of the kind where they'll bankrupt MRM if it can't pay up.

That leave the $190M... of which $45M will be paid, then there's the $55M so far in vessel sales. Most of that would go towards repayment... so that leaves about $100M MRM need to pay within two and a half year.

Not an impossible requirement as oil prices pick up, demand for their services that's to follow.

$200m just normal capital structure?! It may be debt with no fixed end date but it is still debt. It certainly still has periodic covenant tests and it can certainly bankrupt a company.

The $55m in vessel sales is not new money... it is the cumulative proceed from the sales programme. The majority of this proceed is already in the cash flow statement (FY16 $35m, H1 17 $12.4m) and balance sheet.

So if you think MRM only needs to worry about $100m in debt you are off by a factor of 3 minimum.

Vessel sales cashflow in H1 was $12.4m, lower than the $22.6m received in H1 FY16. At a time when balance sheet is stretched, this says something about the market for vessel disposal imo.

This is my last post on MRM... the thread's been derailed more than enough.

 

[luutzu]

$200m just normal capital structure?! It may be debt with no fixed end date but it is still debt. It certainly still has periodic covenant tests and it can certainly bankrupt a company.

The $55m in vessel sales is not new money... it is the cumulative proceed from the sales programme. The majority of this proceed is already in the cash flow statement (FY16 $35m, H1 17 $12.4m) and balance sheet.

So if you think MRM only needs to worry about $100m in debt you are off by a factor of 3 minimum.

Vessel sales cashflow in H1 was $12.4m, lower than the $22.6m received in H1 FY16. At a time when balance sheet is stretched, this says something about the market for vessel disposal imo.

This is my last post on MRM... the thread's been derailed more than enough.

So a company must have zero debt?

$200M was MRM's usual debt structure in the years before the Jaya acquisition. That's not to say that they don't have to repay it; but it is to say that the lenders expect to rollover those debt as MRM's ongoing capital structure. That was before the new half billion equity raising/debt for acquisition.

Sure that $200M is a bit of a stretch now given the now approx $500M non-cash impairment. But given that the bankers are happy, or accepting, of the $45M repayment and pushing the rest back 2.5 years, maybe they're not too worried about not getting their money back. No?

Yes, the $55M is not new, so were the $395M debt I was comparing it to in calculating its contribution to the debt reduction.

Remember too that MRM's new vessel capital expenditure is finished; the new vessels have all won contracts; two of which just started and will bring in operating cash in the H2F17.

Management is, for the first time since the oil crash, saying that they're seeing increased tendering activities; seeing more majors wanting long term contracts to lock in services at current record low prices.

Anyway, who knows what the future holds. I did thought it's going to get bad two years ago when I first bought in, but didn't expect it to be this bad. So it could be a whole lot worst... but for my money, I'm holding and put in two orders. So let's hope it goes bad.