Stock Review: A Capital-light Compounder

This week we look at one of the most overlooked but stellar results of the 2020 reporting season. This company has grown earnings at a compound rate of 44% p.a. for the last four years and requires little capital to grow. The business is benefitting from structural tailwinds and, we believe, is on track to potentially hit the $100M net profit milestone in 2021 yet is only being valued at $550M or a PE of 6x by the market.

Author: Ron Shamgar

Resimac (RMC.ASX) is one of the largest non-bank mortgage originators in the country. Over the last four years, RMC has grown AUM from $8.9bn to $14.9bn, a CAGR of 14%. Over that same period NPAT has grown from $13m to $56m, or 44% CAGR, demonstrating the strong operating leverage in their business model. This was driven by strong net interest margin (NIM) improvement to 190 bps, compared to 153 bps last year, and a significant improvement in their cost to income ratio, now 37.9% compared to 56.6% in FY19. Return on equity (RoE) increased from 17.3% to 25.5%, given the capital light nature of the business. The final dividend was raised from 1 cent to 1.8 cents while the net cash balance rose to $23m.

---

Source: RMC company filings

More importantly, RMC is benefitting from favourable cost of funding while its banking peers are seeing deposit margin pressure. RMC is growing at 7x system growth by offering quick turnaround time for brokers and an excellent service proposition and positioning itself as more of a digital non-bank with a strong direct to consumer digital brand in homeloans.com.au.

Source: RMC company filings

RMC has the most extensive funding of any Australian non-bank both through their international RMBS issuance program and their seven warehouse facilities. This is a key competitive advantage while other lenders have struggled. This was demonstrated by RMC’s AUM growth over the Covid period, where their rate of growth was maintained despite a significant dip in the market. Other non-banks were forced to reduce volume over funding and capitalisation concerns.

Also important is the fact that RMC’s profit is driven not just by NIM but also strong volume growth and a tightly managed cost structure. Their AUM base is 22% higher as a starting point so, in the absence of any further growth in the loan book, RMC could still grow profit in FY21. Dissecting the NIM movement further, NIM increased from 153 bps to 190 bps in FY20, noting that NIM was 183 bps in the 1H FY20 and 197 bps in 2H. The increase was driven by a reduction in the spread between the BBSW and the Cash Rate and RMC only passing on three of the four rate cuts in FY20 (noting that 1 bps is worth $1.3M of PBT).

Source: RMC company filings

If conditions remain as they are today, we believe RMC could deliver a NIM result in excess of 204 bps. If this is the case, RMC could see NPAT in the range of $74m to $105m or a PE multiple of 5-7.5x based on a range of scenarios. Another way to look at the FY20 result is that in spite of the $16m special Covid provision, RMC were still able to grow 2H NPAT to $28.8m. This absorbed 100% of the incremental provision which gives a potential $90m profit start for FY21 plus additional growth. 

We are forecasting potential for $100m net profit in FY21, which should then see the stock valued at around $3.00, more than double its current price. 

---

---

Disclaimer: RMC is currently held in TAMIM portfolios.