Mortgage Advice Bureau (Holdings) PLC (LON:MAB1) is the topic of conversation when Zeus Capital’s Research Director Robin Savage caught up with DirectorsTalk for an exclusive interview
Q1: This morning you published a 20-page research note on Mortgage Advice Bureau, what are the main themes in your report?
A1: The are five main themes, first of all reminding us of the 15% growth in its network, that’s what’s driving the growth. Secondly, that MAB has invested in people and in its management team. Thirdly, they are using fintech to improve productivity. Fourth theme was that MAB has delivered high quality earnings growth and lastly, that this confidence in the earnings growth should be reflected in the implicit risk discount on which the shares trade and therefore on their share price. We should just remember that the outlook is for 16% per annum earnings growth.
Q2: What do you expect to drive MAB’s growth in 2018?
A2: Well, just as in 2017, I expect their growth in the number of advisers, however in future years increased productivity should also help drive growth.
On 16 May, last week, MAB’s AGM statement revealed that it had grown its advisers to 1,116, that’s 13% year-on-year and the new business recruitment of advisers will be weighted to the second half of this year, that’s very similar to last year. The MAB specialist and technology-led approach continues to differentiate MAB compared with other mortgage advice groups.
MAB is 1 year into a 3-year strategic plan to improve its advisers’ productivity and my research note mentions the use of digital links such as portals and open API with lenders to improve customers’ journeys and company cost efficiency. It also mentions their focus on lead generation, its brand and its focus on protection business.
We should remember that their investment in its management team shows the Board’s intentions so in 2017, MAB recruited Emma Hollingworth as Proposition Director Mortgages, Andy Walton as Proposition Director Protection, Gemma Bacon as Brand and Marketing Director and Richard Symonds, as IT Director. Now, this year they have recruited Ben Thompson, Ben Thompson was CEO until recently of ULS Technology and Ben is going to be Managing Director of the group and I expect this investment in people, and into Ben in particular, to reveal itself in increased adviser productivity over time and new initiatives.
Q3: This year MAB1 shares are up 9% to 604p, up over 6% above the FT All Share which is up just 2%. Now, MAB is now within 6% of its all-time high of 640p which was reached in January this year, where do you see their shares trading over the next year?
A3: Last year they were trading below £5 and the shares traded down to 370p in low volumes before rising to a high of £6.40 in January this year, since then, they ticked back to £6. So, this actually seems a good time, in the right context of things, to be buying into Mortgage Advice Bureau.
Investors will remember that MAB pays out over 90% of its earnings as dividends, it’s got a capital-light business model and its delivering organic earnings growth without the need to invest retained earnings.
The dividend yield and discounted value of future dividends are sensible ways to consider MAB’s share price. At £6.00 a share, they trade on a 4% dividend yield, which is just above the market dividend yield. Using a dividend discount valuation, and using my forecasts, I calculate that £6 a share for MAB is consistent with a discount rate of 14.4%.
In my opinion, a sensible discount rate could be as low as 10% or maybe even lower, at 10% this is consistent with a 2% risk-free rate plus 5% equity risk premium plus a 5% forecast risk premium. Now, using this 10% discount rate, I calculate the fair value for MAB on my forecasts is £7. So, I can quite easily see that the shares, if you believe my forecast and believe Mortgage Advice Bureau’s business model, should be worth £7 a share.
With above market growth being expected in 2018 and 2019, remember 16% earnings growth is expected, then we can see that MAB1 shares are attractive, they have both growth and yield attractions.