Company Overview: Resimac Group Ltd (ASX: RMC) is engaged in the business of providing residential mortgage services and asset finance lending. It operates through a multi-channel strategy through its Prime and Specialist products in the geographies of Australia and New Zealand. The Group channelises its business through lending via brokers, wholesale partners, and direct to customers.

RMC Details

Impressive Bottom-Line Growth Aided by Increase in Loan Volumes & Increase in NII: The company is focused on diversifying its revenue streams and expanding its presence into new secured asset classes. In this regard, it has acquired the remaining 40% interest in Resimac Asset Finance, and now owns 100% of the company. The investment rationale aligns with RAF’s business, which comprises both secured commercial and consumer lending.

Robust Performance in FY21:

RMC delivered a decent performance in FY21 and reported robust growth in bottom-line performance, driven by higher Asset Under Management and Net Interest Margin.

• Net Interest Income (NII) grew by ~29% to $242.7 million in FY21, compared to $188.6 million in FY20 aided by a decrease in interest expenses.
• There has been an increase of ~14% in operating expenses to $70.67 million during the year, owing to core banking & origination IT project and marketing costs.
• However, there has been a decrease in loan impairment expense by ~88% to $2.7 million in FY21, compared to ~$22 million in the prior year. This was mainly due to one-off $16.4 million COVID-19 overlay in FY20.
• The cost to income ratio also improved by 580bps to 32.1% in FY21, from a level of 37.9% in FY20.
• The Group reported a statutory NPAT of $107.6 million in FY21, reflecting an increase of ~92% on FY20.

Revenue Performance (Source: Analysis by Kalkine Group)

Increase in AUM:

The company has been reporting a continuous increase in AUM levels with a CAGR of ~16% from the past 3 years.

• Home loans assets under management increased by ~11%, aided by significant growth in New Zealand by ~35% to $0.7 billion as the company continues to expand its presence in the region.
• AUM under Direct-to-Consumer channels grew by ~10% to $1.9 billion on the back of growth in homeloans.com.au.

Improved Funding Terms:

The Group has issued $5.8 billion of Australian and NZ Prime and Specialist RMBS in FY21. The pricing of RMBS decreased materially in H2FY21 and the benefits are expected to flow into FY22 and beyond as higher cost RMBS term out gradually.

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 Group reported decent financial performance in FY21 with an improvement in most of the key metrics during the year. There has been an uplift in the margin performance with gross margin at 45.6% in FY21, compared to 35% in FY20. It ended the period with a cash position of ~$618 million as of 30 June 2021, and with total debt of ~$14,183 million during the same period end.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Funding Risk: The Group is dependent on favourable terms and conditions with respect to its funding facilities and any challenges to its access could affect the profitability of the company.
• Liquidity Risk: It is required to maintain sufficient levels of liquidity to comply with Government mandates and regulations.
• Regulatory Risk: The Government’s policies and interventions from time-to-time basis could also impact the company in the medium term.

Outlook: The company commands a low market share of less than 1% in the ANZ home loan markets. This provides RMC with substantial scope for growth as it continues to expand its presence and diversify its revenue streams. The Group is expected to drive its lending volumes in the asset finance segment bolstered by the acquisition of Resimac Asset Finance brand. It further plans to launch its new digital customer banking business in FY22.

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 management declared fully franked dividends of 6.4 cents per share in FY21, reflecting an increase of ~113% on the prior year. As per ASX, the stock of RMC is trading below its average 52-weeks’ levels of $1.255-$2.800. The stock of RMC gave a negative return of ~11.91% in the past six months and a positive return of ~21.61% in the past one year. The stock has been valued using a P/BV multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average P/BV multiple, considering the inherent risk involved in the lending space, and regulatory influence on the sector. For the purpose of valuation, few peers like Australian Finance Group Ltd (ASX: AFG), Commonwealth Bank of Australia (ASX: CBA), Pepper Money Ltd (ASX: PPM) have been considered. Considering the expected upside in valuation & current trading levels, impressive increase in profitability & NII, improvement in cost to income ratio, growth in AUM and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.885, down by 1.823% as on 11 October 2021.

RMC Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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