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Yellow Brick Road Completes Acquisitions, Revenues Up 27%

Yellow Brick Road (ASX:YBR) has completed the acquisitions of Vow Financial and Resi Mortgage Corporation, a key milestone in its strategy to become a leader in the 'non-bank' sector.

The acquisitions add two profitable businesses that increase its distribution, broaden its capability in mortgages and improved economies of scale.

YBR has also reported a 27.3% increase in revenues to $31.66 million for the financial year ended 30 June 2014 while underlying EBITDA improved by 12% to a loss of $5.14 million.

Excluding the recent acquisitions, the Yellow Brick Road business has completed the establishment phase and will be using the scale generated to date to achieve ongoing and sustainable profitability.

"The acquisition of Vow and Resi is another important milestone in our strategy to become a leader in the 'non-bank' segment of the financial services market," executive chairman Mark Bouris said.

"We now look forward to working with the employees, brokers, franchisees and other business partners of Vow and Resi to develop and enhance their relationships with Vow and Resi as members of the YBR Group."

Vow Financial

Vow negotiates on behalf of its more than 700 mortgage brokers directly with lending institutions and collects up-front and trailing commissions from the lending institutions for the loans introduced by brokers.

It provides a monthly commission payment service to the brokers as well as comprehensive business development support including marketing, professional development and access to a diversified range of products and services.

In consideration for these services, Vow earns fees and retains a share of the commissions collected from the lending institutions.

Vow is a profitable business that will give the company new national distribution channel and broaden its capability in mortgages from new broker groups from which to expand its product suite.

Resi Mortgage Corporation

Resi is one of the few remaining non-bank lenders of scale which is not owned by a "Big 4" banks.

As a mortgage manager and originator, Resi sources wholesale funds from lending institutions and offers its own Resi-branded mortgage products to retail and commercial borrowers through its network of Resi-branded franchise offices, authorised representatives and non-aligned brokers, in addition to its in-house sales team.

Resi's business model involves up-front fees, trailing commissions and margins from clients and lenders respectively.

Resi is profitable and has been in business for over 25 years. It provides significant opportunities for Yellow Brick Road to build revenues, increase margins and gain market position as an alternative to the big 4 banks in Australia.

FY2014 Results

The company's branch network has been a winner in a competitive landscape, recording a 39% increase in revenue.

Mortgage revenue is up 33% with the loan book increasing 49% on the previous period to $2.68 billion while settlements over the 12 months increased to $1.5 billion, a 23% increase over the previous 12 months.

In addition, wealth management revenue is up 72% and represents over one third of branch revenue.

Total funds under Management/Advice have increased 55% to $427 million while life insurance premiums more than doubled to $4.8 million from $2.3 million.

YBR had 206 signed branch licensee agreements as of 30 June 2014, up from 168 a year ago.

Despite this, operating expenses were up just 1%, supporting the economies of scale that are now emerging in the business.

Analysis

Acquiring both Vow and RESI is a key step in achieving Yellow Brick Road's aspiration of becoming a leader in the 'non-bank' sector.

These provides significant opportunities for Yellow Brick Road to build revenues, increase margins and gain market position as an alternative to the big 4 banks in Australia.

Key EBITDA reflected the investments in building its brand and branch network and was struck on 27% higher overall revenue.

The number of signed Branch licensee agreements increased to 206 as at 30 June 2014, up from 168 a year ago.

We consider that 2014/15 will be a tipping point for Yellow Brick Road as it consolidates acquisitions and reaps higher revenues and earnings from these and at the branch network level.

Cash and cash equivalents were a handy $12.1 million as at the end of the financial year.

With its core Yellow Brick Road business having established the scale to achieve ongoing and sustainable profitability, Proactive Investors believes the acquisition sets the stage for the company to be re-rated.

We continue to rate Yellow Brick Road as one of our top picks for 2014/15. We maintain our share price target of $0.73 to $0.97 in 2014.

Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX "Small and Mid-cap" stocks with distribution in Australia, UK, North America and Hong Kong / China.