At first glance, the retiring founders of mortgage manager Homeloans Limited do not appear to have a lot to smile about.
At first glance, the retiring founders of mortgage manager Homeloans Limited do not appear to have a lot to smile about.
Twenty years after establishing the business and five years after floating on the Australian Stock Exchange, Tim Holmes and Rob Salmon have presided over a succession of poor profit results and a weak share price.
Despite all that, Mr Salmon is remarkably upbeat about the current situation.
“It’s by far the most exciting time, certainly since we’ve been listed,” he told WA Business News.
Messrs Holmes and Salmon will be retiring from their executive roles at the end of the year, and will be succeeded by Sydney-based director Brian Jones, who has effectively been running the company for the past 18 months.
The two founders plan to remain actively involved and say they are happy to hand the day-to-day running of the business to Mr Jones, who was previously head of National Australia Bank’s mortgage origination arm, HomeSide Lending.
Mr Jones said Homeloans had a unique business model, as a listed mortgage manager with multiple distribution channels and its own funding lines.
Mr Holmes believes this has been one of the difficulties facing the company.
“It’s quite a complex business, and with our market cap we aren’t covered by any brokers, so it’s just too complex for the market to understand,” he said.
The lack of market support is reflected in Homeloans’ share price, which kicked up in August and September but is back around 38 cents per share.
If share price is any guide to success, then 2001 was the high point for Homeloans.
The company completed a $15 million share float at $1 per share and raised a further $11 million at $1.05 per share.
It used most of the proceeds to make three acquisitions – FAI First Mortgage, Eurofinance and mortgage broker Access Home Loans – and forecast a 2001-02 net profit of $7.8 million.
Its actual profit that year was just $4.6 million.
Worse was to come in 2002-03, when the company reported a big loss after a $22.5 million goodwill write-down. That has been followed by modest profits in the past two financial years.
Mr Salmon argues that Homeloans is in great shape, despite its weak profit reports.
“The accounting standards, and indeed our own [business] model, have worked against us in terms of reported profitability,” Mr Salmon said.
He believes a better guide to the health of the business was its $4.2 million cashflow surplus last financial year.
“I think anyone in the industry will attest that the ultimate acid test of the success of a business is your cashflow, and if you use that as the acid test for Homeloans, today we are substantially more profitable and stronger than we have ever been.”
The Western Australian market, where the company has brand awareness and seven retail offices, accounts for more than one quarter of home loan sales.
The firm had tried to build a national brand, but Mr Holmes said the high cost of publicity and the large number of competitors made it difficult.
“Over a period of time it became obvious to us that we would be better off adopting third party distribution in the eastern states,” he said.
The company recruited Mr Jones in June 2004 to help implement that strategy.
“The past 12 months we’ve rebuilt our capability of distributing loans through mortgage brokers,” Mr Jones said. “All the signs are that we are getting significant traction through that strategy.”
He said loan volumes had increased by more than 25 per cent from the company’s low point nine months ago, when it was adversely affected by the loss of a large group of sales staff.
A third leg to the company’s distribution strategy is Mosaic Financial Services, an ‘aggregator’ that provides services to five mortgage broking firms.
Homeloans, via its subsidiary Access Home Loans, has a 20 per cent stake in Mosaic, which is looking to sign up other mortgage broking firms.
Mr Jones, who played a key role in establishing Mosaic and is its chairman, anticipates it could account for 20 to 30 per cent of Homeloans’ new business.
A key change this year has been the increased use of the company’s own wholesale funding line. About 40 per cent of its loans are funded through its securitisation vehicle, up from 6 per cent.
Looking ahead, Mr Holmes believes the company’s dividend payments will start to attract investor attention.
“We are going to be a yield play going forward,” he said. “If we start to show pe [ratios] which are far higher than industry norms, we are going to get re-rated.
That’s the whole strategy that we are doing.”