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Melbourne, Australia

Solid performance from Mortgage Choice franchise

Australian Franchise News – 26-08-09


Australia’s largest independently-owned mortgage broker, Mortgage Choice Limited (ASX code: MOC) announced a sound annual profit performance despite a volatile housing finance market and the economic downturn.
The leading nationwide franchisor posted a net profit after tax for the year to 30 June 2009 on a cash basis of $13.0 million, representing a 23.9% decrease on the FY08 cash result.
The profit results, as calculated on an AIFRS basis and disclosed in the annual financial report, were buoyed by a one-off non-cash balance sheet adjustment of $15.6 million after tax, resulting in a net profit of $26.8 million.
FY 09 results highlights
  • Net profit after tax on a cash basis was $13.0 million and on an AIFRS basis was $26.8 million. 
  • Loan book stood at $36.03 billion at 30 June 2009, up 8.3% on the $33.27 billion balance in FY08, and ahead of system growth of 8.2%.
  • Total revenue on a cash basis was $140.8 millionand on an AIFRS basis, including a one-off adjustment of $58.6 million, was $192.9 million, up 19.5% on FY08 ($161.4 million).
  • Earnings per share on an AIFRS basis stood at 22.6 cents per share compared to 16.4 cents per share in FY08.
  • Generated $10.1 billion in housing loan approvals and continues to achieve industry-high productivity levels per broker. This result was down on the $11.0 billion in FY08.
  • The Board has declared a final fully franked dividend of 5.5 cents per share taking the total dividends out of FY09 profits to 10.25 cents per share, which was down on FY08 (14 cents per share).
  • Cash received for trailing commission during the financial year was $85 million, which was up 3% on FY08.
  • A total of 65.9% of residential commission revenues was paid to franchise owners compared to 64.6% in FY08.
  • Net assets were $66.4 million, compared to $55.1 million in FY08.
  • Cash flow from operating activities during the year was $13.7 million compared to $17.0 million for FY08.
Key messages
  • A solid performance that delivers on expectations.
  • A number of plans are in place to expand Mortgage Choice’s consumer proposition and propel it forward into a period of strong growth.
  • An iconic Australian brand that has fared well through the downturn thanks to a robust business model and brand, healthy geographic spread and industry leading productivity.
  • Housing finance demand is showing a noticeable improvement while market fundamentals are positive e.g. very low interest rates, improved housing affordability.
  • Mortgage broker channel usage by lenders continues to rise.
Financial performance
Mortgage Choice, a 17-year old mortgage broker with an expansive network of franchises around Australia, has endured the detrimental effect of the global financial crisis over FY09.
As part of preparation for the year-end results, independent actuaries completed an annual review of the Mortgage Choice loan book. This found that the run-off rate had deviated notably from the assumed rate and hence the book had experienced a longer loan life than expected. The subsequent revaluing of the loan book resulted in a one-off, non-cash adjustment to Mortgage Choice’s balance sheet and FY09 profit.  
Total operating revenue on a cash basis for the 12 months to 30 June 2009 was $140.8 million ($192.1 million AIFRS). This included $53.4 million derived from new mortgage origination. Trailing commission revenue for the year derived from the existing loan book stood at $136.7 million, including a $58.6 million adjustment due to the previously mentioned review. The company’s loan book stood at $36.03 billion at 30 June 2009.
The result was in line with expectations and guidance given in February 2009 and reaffirmed on 14 August 2009. The loan book performance exceeded expectations, with an independent review in March 2009 showing loan life improved significantly by reaching 4.4 years for existing loans and 5.0 years for new loans, while the monthly run off rate reduced by 4% between 2008 and 2009.
Chief Executive Officer Michael Russell said, “Mortgage Choice has delivered a sound result during a challenging year. The resilience, loyalty and team spirit of our franchise network and staff have helped the company rebound to a strong position, where we are able to take advantage of the opportunities we are actively seeking.”
Business update
A well-recognised brand with a healthy geographic spread, Mortgage Choice continues to boast industry-leading productivity of approximately 8 loans per loan consultant per month. This was up on FY08 and ahead of budget, despite the effects of the financial crisis. The result was a pleasing reinforcement of the quality of its nationwide franchise network and the service they continue to provide to their local communities.
Group Office leads for the year, which are distributed to franchisees on a rotational basis, increased by 0.5% to over 38,000.
“The company’s key points of difference – being Australia’s largest independently-owned mortgage broker; and a broker that pays its franchisees the same rate of commission regardless of the home loan product chosen by their customer – stands us in good stead for the future as we capitalise on our potential,” Mr Russell said.
“Mortgage Choice will do this through growing our franchise network, broadening our product and service offering and improving the way we promote our services to consumers while educating them about the market.
“We are very pleased to see franchisees already enthusiastically diversifying their customer service proposition to reinforce their duty of care and create new revenue streams. This said, residential mortgages will remain our core proposition.”
Mortgage Choice Group and State Offices have developed a number of clear and measurable goals for FY09 and, most importantly, a strategic plan to deliver them. The plan’s codename, DREAM, is an acronym for:
  • Diversification – introduce new products to increase revenues, enhance customer retention and strengthen our duty of care to our customers.
  • Recruitment – re-ignite recruitment initiatives for new franchisees while adding value for them, with greenfield sites a priority.
  • Existing franchises – foster initiatives to escalate their organic growth.
  • Acquisitions – identify acquisition opportunities that meet our benchmarks.
  • Manage costs – continue diligent management of our cost base and work hard to create scalable business platforms.
Mr Russell added, “Initiatives being implemented immediately include: new policies regarding franchisees acquiring loan books externally and internally, trailing commission payments to greenfield rookies being revised upwards, updating our franchisee Cash Flow Tool to better demonstrate the potential earnings from our non-core product range and, finally, a rewards program for non-core products high achievers.”
“Franchisees will find the future contains a plethora of exciting opportunities that will inspire and motivate them to grow their businesses. We will be there every step of the way to ensure both the company and our network shares in what is shaping up to be a defining year in the mortgage broking industry.”
Market outlook
“The economic outlook is encouraging, with most economists and commentators seeing a solid recovery begin over FY10 before strong growth returns in FY11 and FY12 as consumer and business sentiment, as well as employment, regain momentum,” said Mr Russell.
“Positive conditions over the next financial year such as low interest rates, housing undersupply, strong population growth and low rental vacancy rates will encourage further interest in the property market.
“While housing finance figures at present show strong demand from first homebuyers as a percentage of owner occupied loans, we expect this trend to soften while upgraders, refinancers and investors increase their presence over the coming year.
“The mortgage broking market continues to be a valuable consumer proposition, with Genworth Financial Mortgage Trends Report for July 2009 showing that 41% of new home loans in Australia are sourced by mortgage brokers. The report also uncovered a further 16% of borrowers who had never used a mortgage broker but would consider doing so in future.
“As small business owners, mortgage brokers take great care in providing superior customer service, as their livelihood depends on customer retention and referral. We continue to offer an important service to an increasingly time-poor and confused society: guiding customers through a wide range of lenders and loan products to help them find clarity over loan choice.
“Not only are our marketing activities, business processes, network resources, and training programs being revamped to prepare us for the evolution of the mortgage market post-GFC, we are improving them to make the most of our diversification strategy.
“The importance being placed on the diversification of our service offering, by expanding our range of non-core products such as risk insurance, asset finance and commercial and personal loans, will deliver an increasingly effective flow of additional income to the company and its franchisees.
“Mortgage Choice, via DREAM, will consolidate and grow with vigour. Our Group and State Offices and our franchise network are powering through a period of change that will see us take advantage of the many opportunities we are facing.
“Enabling our franchisees to achieve their potential will see the company building strong value for all its stakeholders and gear us for an impressive improvement in results for FY10.”
Under AIFRS (Australian International Financial Reporting Standards) Mortgage Choice is obliged to include in its financial statements for any period an estimate of all the trailing commission that will be received and paid over the life of the loans settled during the period. This estimate is stated at “present value”, reflecting the fact that cash receivable and payable in the future does not earn income in the meantime and so its value today is less than the total of all future cashflows.

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