Company: Australian Finance Group Ltd
ASX Code: AFG
Shares on Offer: 101.5m
Listing Price: $1.20 - $1.38
Market Capitalisation: $257.8million -
Listing Date: May 22nd
As the lowest domestic interest rates in 50 years ease further, Australia’s financial regulators have maintained a close eye on the housing market. The banking regulator issued new guidelines for lenders in December, just as the value of mortgage commitments completed a 24 month expansion exceeding 40 per cent. Whilst short of being mandatory – the guidelines suggested lenders appraise loan serviceability with a 7 per cent base line lending rate – which is circa 50 per cent higher than current market mortgage rates.
The banking regulator also flagged caution to lenders aggressively expanding their investment mortgage books. During the preceding 12 months, investment loans had become the mortgage market’s dominant growth driver – expanding at approximately twice the pace of owner occupied loans. Whilst added scrutiny may temper the market’s growth trajectory – its underlying rate of expansion through various property cycles over the past three decades stands near double digit territory.
The coming listing of Australian Finance Group (AFG) is poised to become a major indicator of demand trends in the domestic mortgage market. The financial services company is focused on mortgage broking. It has a significant wholesale operation, sourcing lending products from over 30 principal lenders, which are subsequently distributed through a network of 2,300 affiliated brokers.
As AFG’s Initial Public Offer represents partial a sell down by existing shareholders, incentive for new investors is provided by the Company’s market position and recent growth trajectory. Established in 1994, AFG now services a loan book exceeding $1billion, representing an 8.4 per cent share of the Australian mortgage market. AFG is on course to record its fourth consecutive year of increasing revenue and broker members in FY16.
With AFG historically expanding in excess of the underlying mortgage market, participants in the Initial Public Offer are being offered a mix of yield and capital growth potential. Whilst vendors are scheduled to retain a dominant interest in the Company post listing, risks for new investors appear to be primarily cyclical. The mortgage market has experienced a period of above average growth during the past two years and concurrently, AFG’s earnings have become more weighted toward upfront commissions. Hence if recent regulatory scrutiny on the industry tightens further – sustaining recent growth may become a challenge.
Author: Tim Morris
May 18, 2015
Having studied Commerce and Science at the University of New South Wales, Tim began his career in an analytical capacity with Wise-owl. Tim has conducted over 500 corporate valuations and appraisals, specialising in pre revenue assets and emerging markets. For the last five years, his Equity Capital Market insights have been featured as part of a weekly column in The Australian and regularly features on Sky News, CNBC, ABC and Bloomberg TV.