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Based in Moorpark, CA, PennyMac Financial Services (NYSE:PFSI) scheduled a $200 million IPO with a market capitalization of $2.3 billion at a price range mid-point of $18, for Thursday, May 9, 2013.

Nine other IPOs were scheduled for the week of May 6th. The full IPO calendar is here.

  • S-1 filed April 29, 2013
  • Manager; Joint Managers: Citi; BofA Merrill Lynch; Credit; Goldman
  • Co Managers: Barclays; J.P. Morgan; Morgan; Wells Fargo

SUMMARY
PFSI is a mortgage packager and reseller and also has a management fee revenue stream from PennyMac Mortgage Investment Trust (NYSE:PMT), which has a market capitalization of $1.48 billion.

MARCH QUARTER A DISAPPOINTMENT
Net income decreased by $2.6 million in the quarter ended March 31, 2013, as compared to the quarter ended December 31, 2012, from $57.9 million to $55.3 million.

This was due to the effect on net gain on mortgage loans held for sale at fair value of a decrease in loan production volume resulting from higher mortgage interest rates in the period and increasing competition in the mortgage marketplace.

These same factors caused reduced fulfillment fees from PMT. These decreases were partially offset by increased management fees and carried interest resulting from incentive fees relating to PMT being earned and improved performance of the Investment Funds during the quarter ended March 31, 2013, as compared to the quarter ended December 31, 2012.

These net reductions in revenues were offset by decreased compensation expense as compared to the prior quarter due to reduced accruals of incentive compensation.

At March 31, 2013, PFSI had total assets of $693 million and total equity of $308 million.

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

*December 2012 yr

Cap (MM)

Sales

Earnings

BkValue

TangibleBV

in IPO

PennyMac Financial Services (PFSI)

$2,322

8.54

19.7

4.87

3.0

9%

Nationstar Mortgage Holdings Inc (NYSE:NSM)

$3,360

3.41

16.4

4.43

30.0

PennyMac Financial Services (PFSI)

$2,322

5.43

10.0

annualizing March '13 qtr

Glossary

NUMBER OF SHARES
There's a real issue regarding the number of post-IPO shares. There has never been an IPO in memory that has deliberately obfuscated the number of post-IPO shares. Here's the best we could do and it took a lot of work.

Calculating the number of shares, p64

Pro forma net income attributable to the controlling and non-controlling interest

$110

Earnings per share

$0.93

Number of shares pre-IPO , 110/.93

118

Add 11mm new shares in the IPO

11

Total shares

129

Glossary here

CONCLUSION
That purposeful obfuscation regarding number of shares is enough to pass on the IPO.

The March quarter itself was weak in comparison with the December quarter, based on the market tightening, see "March quarter disappointment" above.

It looks like PSFI is priced at the same book value as NSM, but at a price-to-sales premium and a P/E premium. Finally, there are so many run-on sentences in the filing that it is hard to understand easily.

There seems to be too much investor risk at the IPO price range mid-point of $18, and it seems prudent to pass on the PFSI IPO.

BUSINESS
PFSI is a mortgage packager and reseller and also has a management fee revenue stream from PennyMac Mortgage Investment Trust, which has a market capitalization of $1.48 billion.

TWO BUSINESS SEGMENTS

Mortgage Banking

The principal mortgage banking subsidiary, PennyMac Loan Services, LLC, or PLS, is a leading non-bank producer and servicer of mortgage loans in the United States.

PLS is a seller/servicer for the Federal National Mortgage Association, or Fannie Mae (OTCQB:FNMA), and the Federal Home Loan Mortgage Corporation, or Freddie Mac (OTCQB:FMCC), each of which is a government-sponsored entity, or GSE.

It is also an approved issuer of securities guaranteed by the Government National Mortgage Association, or Ginnie Mae, a lender of the Federal Housing Administration, or FHA, a lender/servicer of the Veterans Administration, or VA, and a servicer for the Home Affordable Modification Program, or HAMP.

As of December 31, 2012, PFSI serviced or subserviced approximately 123,000 loans with an aggregate UPB of approximately $28.2 billion. The majority of these loans are serviced for Fannie Mae, Freddie Mac or Ginnie Mae securitizations.

Investment Management

PFSI's principal investment management subsidiary, PNMAC Capital Management, LLC, or PCM, is an SEC registered investment adviser.

It manages PennyMac Mortgage Investment Trust, or PMT, a mortgage "real estate investment trust," or REIT, listed on the New York Stock Exchange. PCM also manages PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, LP, both registered under the Investment Company Act of 1940, an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC.

As of December 31, 2012, PFSI's Advised Entities had combined net assets of approximately $1.8 billion.

MARKET OPPORTUNITY

The U.S. residential mortgage industry is one of the largest financial markets in the world, with approximately $10 trillion of outstanding debt and average annual origination volume of $1.7 trillion for the five years ending December 31, 2012.

GROWTH PLAN

  • PFSI intends to grow its Servicing Portfolio Organically and through Opportunistic Acquisitions.
  • Grow Correspondent Lending through Expanding Seller Relationships
  • Grow Retail Lending through Portfolio Refinance and Non-Portfolio Originations

COMPETITION AND MARGINS
In recent periods PFSI has seen increased competition from new and existing market participants in both correspondent lending and retail origination businesses, as well as reductions in the overall level of refinancing activity.

PFSI believes that this change in supply and demand within the marketplace has been driving lower production margins in recent periods, which will be reflected in results of operations in gains on mortgage loans held for sale.

Although margins on gains from mortgage loans held for sale benefited from wider secondary spreads (the difference between interest rates charged to borrowers and yields on mortgage-backed securities in the secondary market) early in the fourth quarter of 2012, margins narrowed somewhat as the quarter progressed.

While production margins remained elevated from a historical perspective during the fourth quarter of 2012, PFSI expects them to begin normalizing towards their long-term averages in 2013, and PFSI has begun to see evidence of this normalization in the first quarter of 2013.

COMPETITION
In the mortgage banking segment, PFSI competes with large financial institutions and with other independent residential mortgage loan producers and servicers, such as Wells Fargo, JPMorgan Chase, Bank of America, Citigroup, U.S. Bank, Quicken Loans, Nationstar Mortgage, Ocwen Financial Corporation and Walter Investment Management Corp.

In the correspondent and retail lending businesses, PFSI competes on the basis of product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees.

In the servicing business, PFIS competes on the basis of experience in the residential loan servicing business, quality of high-touch special servicing and historical servicing performance.

STRUCTURE
Following this offering PennyMac Financial Services, Inc. will be a holding company and its sole asset will be an equity interest in Private National Mortgage Acceptance Company, LLC.

PennyMac Financial Services, Inc. will operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC and its subsidiaries.

PennyMac Financial Services, Inc. was incorporated as a Delaware corporation on December 31, 2012. PennyMac Financial Services, Inc. has not engaged in any business or other activities except in connection with its formation.

5% STOCKHOLDERES PRE-IPO
BlackRock Mortgage Ventures, LLC, 34%

HC Partners LLC, 32%

Kurland Family Investments, LLC, 13%
Stanford Kurland, 13.6%

Stanford Kurland: Mr. Kurland has been the Chairman and Chief Executive Officer of PennyMac Financial Services, Inc. since its formation and has been the Chairman and Chief Executive Officer of Private National Mortgage Acceptance Company, LLC since its formation in January 2008. In addition, Mr. Kurland has been the Chairman of the Board of Trustees of PennyMac Mortgage Investment Trust since July 2009, the Chairman of PNMAC Capital Management, LLC since March 2008, and the Chairman of PennyMac Loan Services, LLC since its formation in February 2008.

Before founding the Company, from January 1979 to September 2006, Mr. Kurland served as a director and held several executive positions, including president, chief financial officer and chief operating officer, at Countrywide Financial Corporation, a diversified financial services company that was sold to Bank of American and caused major financial losses for BofA.

DIVIDEND POLICY
PFSI has no current plans to pay a dividend.

USE OF PROCEEDS
PFSI expects to net $188 million from its IPO.

PFSI intends to use the net proceeds from this offering to purchase newly-issued New Holdings Units from Private National Mortgage Acceptance Company, LLC.

PFSI intends to cause Private National Mortgage Acceptance Company, LLC to use these proceeds primarily to provide capital to grow its mortgage banking business and for general corporate purposes.

Disclaimer: This PFSI IPO report is based on a reading and analysis of PFSI's S-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: PennyMac Financial Services