Company Overview: Resimac Group Limited (ASX: RMC) is one of the leading non-bank lenders that operates a multi-channel distribution business. The company’s integrated business model covers originating, servicing and funding prime, non-conforming residential mortgages and asset finance products in Australia and New Zealand. RMC has over 50,000 customers with a portfolio of home loans of more than $14 billion and assets under management of over $16 billion.

RMC Details

Diversification of Business to Fuel Bottom Line and Future Growth: In the past months, business diversification has been a major focus for the company, evident by the acquisition of the remaining 40% of asset finance lender International Acceptance Group. RMC also introduced new products to its direct-to-consumer brand homeloans.com.au in order to capitalise on segment-specific market opportunities, reflecting its agility as a non-bank lender. Looking forward, RMC is likely to enhance its Asset Finance division mainly in the next three years and planning to roll out alternative loan products, which are focused on sustainability.

1HFY22 Trading Updates: 

• RMC posted record home loan settlements of $2.5 billion from July to October 2021, indicating a rise of 72% on the pcp.
• As on 31 October 2021, the home loan portfolio rose to $14.5 billion, reflecting annualised growth of 15%. In addition, October applications were 70% higher than the monthly average of Q1FY22.
• The company increased its geographical expansion, evident by the successful new loan origination system in NZ and is likely to launch in Australia during mid-December 2021. This is likely to generate the required growth in its origination process to support the aim of $8 billion of home loan settlements in FY24.

FY21 Financial Highlights:

• For the year ended 30 June 2021, the company recorded a rise of 29% in net interest income (NII) to $242.7 million as compared to $188.6 million in FY20
• Backed by the growth of 11% in home loan assets under management to $13.8 billion, normalised NPAT for the year amounted to $104.0 million, reflecting a growth of 87% over pcp.
• These robust results represent decent momentum of its business, fueled by growth in prime and specialist portfolios in Australia and New Zealand, development of its broker and direct-to-consumer brands, strong investor demand for its bonds, and ongoing investments into its digital transformation.
• Cost-to-Income ratio for the year improved to 32.1% as compared to 37.9% in FY20 and paid a total dividend of 6.4 cents per share, reflecting a rise of 113% over pcp.

Cost-to-Income Ratio Trend (Source: Analysis by Kalkine Group)

Share-Buy Back Programme:  As announced on 13 December 2021, the company is likely to commence an on-market buy-back of 408,792,525 ordinary shares on 29 December 2021 for up to 12-month periods. RMC believes that the share buy-back showcases an opportunity to add value to the remaining shares on issue. In addition, RMC advised shareholders that there is no certainty that it will acquire any or all shares under the Share Buy-Back.

Top 10 Shareholders: The top 10 shareholders together form around 72.34% of the total shareholding, while the top 4 constitute the maximum holding. Somers Ltd and Motrose Proprietary Ltd. are holding a maximum stake in the company at 62.25% and 3.60%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company recorded a growth in gross margin to 45.6% in FY21 as compared to 35% in FY20. Net margin for FY21 stood at 22.6% against 11.9% in FY20. Cash cycle for the year was 10.4 days as compared to 24.5 days in FY20. On the leverage side, debt-to-equity ratio for FY21 was improved to 44.17x against 52.59x in FY20.

Margin & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Capital and Liquidity Risk: RMC is required to maintain enough liquidity levels under Australian Financial Services Licence requirements as it operates in the lending business.
• Regulatory Risk: The group is exposed to a more complex regulatory environment as it deals in the public money and finances.
• Federal Election: Upcoming Federal election in May 2022 may pose an operational risk for the business in 2HFY22.

Outlook: The company believes that the stable funding markets and lower cost of funds may provide a runway to target further growth in FY22 and beyond. For 1HFY22, the company anticipates home loan settlements to be around $3.3 billion. In addition, RMC anticipates 1HFY22 normalised NPAT to be in line with or higher than 1HFY21 by assuming financial markets to remain stable for the remainder of 1HFY22. The company’s investments in digital transformation are likely to transform the digital customer experience and deliver a platform for sustainable and scalable growth. Moreover, the company is optimistic that consumer expenditure would expand from Q1FY23, which may result in returns to business and investors’ confidence.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of RMC has been corrected by ~18.66% in the past three months. The stock is trading below its 52-week low-high average of $1.525 - $2.800, respectively. The stock has been valued using a P/BV multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average P/BV multiple, considering the decent momentum in the business and stable funding markets, etc. For the purpose of valuation, peers such as Genworth Mortgage Insurance Australia Ltd (ASX: GMA), Australian Finance Group Ltd (ASX: AFG), Pepper Money Ltd (ASX: PPM), and others have been considered. Considering the expected upside in valuation, focus on diversification, rising home loan settlements, decent momentum in the business, rising NPAT, stable funding markets, optimistic long-term outlook, current trading level, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.735 as on 20 December 2021, 12:05 PM (GMT+10), Sydney, Eastern Australia.

RMC Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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