Mortgage Advice Bureau (MAB1) – Quality and income

Mortgage Advice Bureau (MAB1) – Quality and income

Derby-headquartered Mortgage Advice Bureau (MAB) provides mortgage, protection and general insurance advice. Sparking my interest in it is the fact that it generated a robust 100% return on capital employed (excluding goodwill) in 2017!

It was co-founded in 2000 by CEO Peter Brodnicki – he currently has a 27% stake in the business. It eventually listed on AIM in 2014 at 160p (latest share price 510p, current market cap £261 million).

Mortgage Advice Bureau is easy to overlook given that it is listed in the mortgage finance sub-sector (ICB classifications). However, it doesn’t issue mortgage loans and isn’t exposed to mortgage credit risk.

It’s the leading UK mortgage broker in terms of brand awareness and continues to take market share. The number of MAB advisors was 1,138 at June 2018 versus only 489 at the end of 2013.

MAB’s year-end mortgage advisors

(Source: MAB)

The Mortgage Advice Bureau brand

(Source: MAB)

MAB CEO Peter Brodnicki: an industry leader

MAB founder and CEO, Peter Brodnicki, has won the British Mortgage Awards Business Leader of the Year award for three consecutive years. He has also won the Mortgage Strategist of the Year award for two consecutive years.

He worked at Legal & General for five years prior to MAB as the head of the estate agency network and as a Recruitment Director. Before that he worked at Abbey Life and at the mortgage broker and advisor John Charcol.

(Source: MAB)

MAB share price since November 2014 IPO at 160p

(Source: SharePad)

Key questions when considering a new company include:

What is the financial track record?

MAB has grown its revenue from £40 million in 2013 to £109 million in 2017 on the back of advisor growth. The return on capital employed (ROCE) was a punchy 77% in 2017 and if we exclude goodwill the figure was 100%.

The cash flow return on capital employed (CROCI) was 78.6% in 2017 and both the ROCE and the CROCI have improved over time. MAB is a cash generative business with free cash flow conversion of 118% in 2017 and 127% in 2016.

MAB revenue and profit growth

(Source: SharePad)

MAB’s impressive returns

(Source: SharePad)

What does MAB do?

MAB provides regulatory oversight for Appointed Representatives (ARs) who in turn employ mortgage advisors. Mortgage Advice Bureau currently has over 150 ARs in its network and they employ 1,138 mortgage advisors.

The group is responsible for the products advisors sell and the quality of the customer service and advice. Appointed Representatives can operate under the MAB brand, under a franchise agreement, or just be part of the group’s network.

MAB’s business model

(Source: MAB)

What is the market backdrop and market share trend?

In 2017 around 70% of UK mortgage market lending was through the intermediary channel (Simplybiz IPO prospectus, P 24). This compares to 55% in 2013 and shows that increased regulation has made intermediation more popular.

Customers and banks benefit from mortgage intermediation with it making the process more efficient. Customers only have to go through the application process once and banks are given qualified leads.

According to a fellow Cube writer, price comparison website often don’t have all the mortgage deals available. Advisors also help in dealing with complex circumstances and it is typically the lenders that pay their fees.

MAB has been increasing its market share of new mortgage lending since listing with it up 18% in 2015 to 3.6%. In the first half of 2018 Mortgage Advice Bureau saw its market share increase to 4.7%.

What is MAB’s competitive position?

A person performing a regulated financial function in the UK has the option of being directly authorised (DA) by the regulator. Alternatively, they can operate as an appointed representative (AR) of a regulated firm.

MAB believes it has a stronger proposition than rival AR networks and also DA mortgage brokers. This is due to the national brand, direct supervision of advisors, long-term contracts with ARs and a clawback fund.

Source: MAB

MAB has a leading brand with 21% of survey respondents aware of it (June 2017 survey of 2,006 UK adults). This compares to 16% for London & County, 8% for Habito and 7% for Alexander Hall.

Habito was founded in 2015 and could prove to be a disruptive competitor – the “Hell or Habito” TV ads are catchy! link. In my view, the complex and regulated nature of mortgages should ensure that advisors continue to have a role.

UK mortgage broker brand awareness

(Source: MAB)

What is the financial model?

All advisor commission income is paid to MAB with the group deducting its share along with a circa 5% charge to the clawback fund (a provision for redress issues). MAB pays ARs on a weekly basis and they are then responsible for paying their advisors.

In 2017 Mortgage Advice Bureau generated 43% of its revenue from mortgage procuration fees. Insurance commission accounted for 39% of revenue and client fees came in at 16% of revenue.

MAB revenue breakdown

(Source: MAB)

Key risks

Key risks include the cyclical nature of mortgage demand, disruptive competition and a failure of MAB to regulate advisors. Competition is a long-term threat and the progress of new entrants (e.g. Habito) will need to be closely monitored.

It is impressive that MAB remained profitable even when gross mortgage lending in the UK reduced between 2007 and 2010. The balance sheet has also been improving with £12.5 million of unrestricted cash at mid-2018 (4.7% of the current market cap).

2005-2017: UK gross mortgage lending & MAB pre-tax profit

(Source: MAB)

MAB’s improving cash balance

(Source: SharePad)

Valuation

Mortgage Advice Bureau trades on a forecast rolling P/E of 17.3X i.e. forecast earnings for the next twelve months. The forecast P/E is expected to decline to a modest 13.5X in 2020 and the forecast yield is 6.6% in 2020 (1.1X dividend cover).

However, this is dependent on strong revenue growth being achieved. Revenue is forecast to increase by 16.5% in 2018, by 11.2% in 2019 and then by 28% in 2020. The pace of forecast revenue growth appears to be fairly ambitious!

MAB historic and forecast P/E rating

(Source: SharePad)

Historic and forecast dividend yield

(Source: SharePad)

Summary

Mortgage Advice Bureau ticks a lot of boxes. The founder continues to run the business and has a 27% stake. The company has the leading brand and is continuing to take market share.

On the financial side, earnings convert into cash and the financial return on invested capital is impressive. Brexit is a near-term risk, given the cyclical nature of mortgage demand, while digital disruption is a long-term risk.

Do let us know your mortgage application experiences below. Any mortgage advisors who want to chip in are most welcome!

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