Yellow Brick Road (ASX:YBR) is making significant headway in the first half of FY2015, recording record mortgage settlements in October.
This follows the successful acquisitions of Vow Financial and Resi Mortgage Corporation and highlights its progress towards becoming the second largest non-bank entity in Australia.
Monthly settlements for October closed at $973 million, a 75% increase over October 2013 (as if YBR had then owned the Vow and Resi businesses).
The company is moving to implement best practices across the group, as well as introduce the products and services from each individual business into the wider network.
Its distribution footprint has also grown considerably.
"The momentum in our mortgage growth is very pleasing as is the progress we are making on the integration of the three businesses," executive chairman Mark Bouris said.
"As a united group we are working together on leveraging our internal mortgage product capability into all businesses and starting the Wealth Management journey in Vow and Resi."
The combined group has enjoyed strong momentum in mortgage activity as applications continue to build off the back of increased marketing activity.
While monthly settlements rose 75% to $972 million in October, the application pipeline indicates that November and December are shaping up to surpass October's settlement numbers.
Closing loan book value as at 31 October 2014 was $26.5 billion, which is 21% more than at the same time last year of $22 billion (as if YBR had then owned Vow and Resi).
YBR is targeting consistent monthly settlements in excess of $1 billion.
Immediately following the finalisation of the acquisitions of Vow and Resi, the company moved to implement best practices across the group, as well as introduce the products and services from each individual business into the wider network.
It has progressed the following initiatives:
- The Vow "whitelabel" product (funded by Macquarie) was launched to the Vow broker network at their annual conference, which took place immediately following the acquisition of the business. Early take by Vow brokers has been good with settlements already starting to flow through;
- The Resi home loan product has been launched to the Vow broker network and Yellow Brick Road branch network with competitive fixed rates as well as the non-resident borrower capability, which is proving popular with Asian investors;
- The Yellow Brick Road Wealth Management strategy has been introduced to the Vow and Resi businesses. Training and accreditation has commenced;
- An emphasis on improving cross sell performance across all three businesses (General Insurance, Leasing, Commercial, Legal) has begun; and
- Functional integration with a focus on delivering efficient, quality support to the three businesses in the areas of Finance/Operations, Compliance and Technology.
Expanded distribution footprint
With the acquisition of Vow and Resi now complete, the distribution footprint has grown considerably.
Vow broker numbers have continued to rise and as at 31 October 2014, 745 brokers operated under the Vow business.
The Yellow Brick Road business is also continuing its growth trajectory of three to four new branch license agreements per month with 219 branch licenses signed as at 31 October 2014.
A number of recruits remain in the pipeline for the second half of FY2015.
Overall, the combined network of "Distributors" of the YBR Group (consisting of Yellow Brick Road licensees, Vow brokers and Resi franchisees) hit 1,035 at 31 October 2014.
In the September quarter, YBR reported receipts from customers of $16.01 million, up 125% from the previous quarter.
This includes a 157% increase in receipts from branches to $14.66 million and one month of receipts from Vow and Resi.
Net operating cash outflows were also higher at $3.88 million due to the acquisitions and related matters. This is expected to return to sustainable levels in the current quarter.
The record 75% growth in mortgage settlements in October is a clear step ahead in Yellow Brick Road's strategy to become Australia's second largest non-bank entity.
Adding value, the application pipeline indicates the company should see further growth in mortgage settlements in November and December.
Integration of the recent acquisitions is also continuing as its distribution footprint grows.
This provides further support to our belief that FY2015 to be the tipping point for Yellow Brick Road as it consolidates the acquisitions and reaps higher revenues and earnings from these and at the branch network level.
This should in turn set the stage for the company to be re-rated by the investment market as additional institutional investors "weight" in the stock.
YBR has a still sizeable $11.5 million in cash plus $7.5 million in undrawn borrowing facilities at the end of the September quarter.
We continue to rate Yellow Brick Road as one of our top picks for 2015, and maintain our share price target of $0.73 to $0.97.
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