Jenny Ruth: Different strokes for similar folks

They're both in the mortgage-broking business and they both listed on the stock exchange last year.

But the way the sharemarket has treated New Zealand Finance Holdings and Mike Pero Mortgages couldn't be more different.

Mike Pero shares were issued at $1 in May and are now trading at 60c. That means the company floated at a $25 million value is now considered by the market to be worth only $15 million.

NZ Finance shares were issued at 30c in October and they were trading at $1 yesterday. That values the company at $76.7 million, up from the $20.7 million float value.

An obvious observation is that the Mike Pero float was over-priced and I certainly thought it was.

It was priced at 20.83 times its 2004 earnings and 16.13 times its forecast earnings for the year to this June.

By contrast, NZ Finance shares were issued at 10.3 times its earnings for the year ended March last year.

The two companies had quite different reasons for listing. For Mike Pero's major shareholder, Christchurch businessman George Gould, it was a case of "a quick flick".

He bought the company for $15 million in March last year and floated it in May, valuing it at $25 million - and I've never understood where the extra $10 million came from.

Nevertheless, there were enough investors around to see the float fully subscribed - the company had aimed to raise a minimum $7 million and allowed for over-subscriptions up to $10 million, and got the lot. Gould retained a 54 per cent stake and founder Mike Pero owns 6 per cent.

In NZ Finance's case, its major shareholders were reluctant sellers, so reluctant they even miscalculated the minimum number of shares they had to sell to meet stock-exchange requirements to have at least 25 per cent of the shares held by the general public.

They ended up having only 24.3 per cent held by the public and had to get a waiver from the stock exchange giving them another six months to meet the requirement. A placement to the wealthy Huljich family in February and a share issue to pay for the purchase of Approved Mortgage Brokers this month have solved that problem.

The major part of the share price surge began after the Huljich placement and attendant publicity.

NZ Finance wasn't in any great need for capital either: the float raised only $2.94 million and just $1.65 million of that was fresh capital.

The main reason its three major shareholders wanted to list was to boost their company's status and profile. They put that higher status to good use with the Approved purchase.

(Although Approved's shareholders accepted NZ Finance shares reluctantly, they must be delighted now. Their shares were issued at a nominal 45c, valuing the business at $1.2 million. Those shares are now worth $2.7 million.)

One of those shareholders, NZ Finance managing director John Callaghan, said he would have preferred to sell no shares.

"I've got a long-term view within this industry. I've got a vision as to where I would like to take this."

NZ Finance didn't include a forecast in its prospectus, other than a cashflow projection for the curious period of the 13 months to August next year, when the company is expected to have generated a net $5.24 million from operations.

At the time, the company said it didn't want to go any further into the realm of forecasting than it had to. By mid-December, the directors had mustered the courage to forecast that net profit would exceed $2.5 million for the year to March, a 50 per cent increase on the previous year.

In the event, the company - the first with a March balance date to report its results this year - delivered a 71.2 per cent rise to nearly $2.8 million.

A count against NZ Finance is that it doesn't pay dividends, wanting to keep its capital to fund growth. Callaghan says the company is considering paying a dividend this year but with a reinvestment programme attached, and that the three major shareholders will reinvest their dividends.

Of course, the market usually loves companies that beat their forecasts but Mike Pero has been no slouch on that front either.

Last July, it said its first profit announcement, for the four months ended June, would be about 20 per cent higher than the $338,028 forecast in the prospectus. In the event, the result was 21.3 per cent higher at $407,841.

In February, when it reported an $802,061 net profit, the company said it was "on track" to achieve its just under $1.6 million prospectus forecast for the full year.

The company also said that revenue in the first half was lower than expected and that transaction volumes should pick up in the second half - housing market figures certainly suggest that's been the case.

The company is also ahead of its target in signing up new franchisees. The prospectus said four would be signed up by June 30 this year but the company had already signed five in February and has since signed another, with two more prospects about to start training.

To achieve the profit forecast, the company would need to make only $751,495 in what is seasonally its stronger half-year. My guess is that it will easily exceed that forecast.

Another signal you would expect the market to react favourably to is that chief executive Jeff Staniland was buying shares back in November, albeit a small parcel. He paid $5840, or 80c a share, for 7300 shares, boosting his stake to 52,300 shares and 30,000 options (deeply out of the money at present).

The only really negative factor for either company has been National Bank's decision to raise the upfront commissions it pays mortgage brokers from 0.55 per cent to 0.75 per cent of the loan value from June 1 and to stop paying trail commissions - 0.2 per cent of the loan value annually for every year the loan remains in force. National's parent, ANZ Bank, is expected to make a similar decision.

This news caused barely a blip in NZ Finance's share price, but Mike Pero shares have been hammered.

That is partly because NZ Finance spelled out that the impact on the company would be minimal. Its New Zealand Mortgage Finance brokerage subsidiary contributed 5.7 per cent of group net profit after tax for the year ended March and the National Bank trail revenue made up just 0.002 per cent of total group revenue.

Mike Pero was less specific, with Staniland saying the impact was uncertain and would depend on how much business it put National's way in future. At the present level, it would have a "relatively minor" effect in the first year, which would be reversed the following year.

Staniland says the board is considering whether to provide more specific information but points out that it will be historical.

ANZ, National, ASB Bank and Westpac account for about 80 per cent of the Mike Pero business. According to the prospectus, 60 per cent of the company's revenue in the year ending June will come from brokerage and another 26 per cent from trailer commissions.

Staniland says that could well change as the company deals regularly with 16 lenders.

Mike Pero is a pure mortgage broker, but NZ Finance is also a lender in its own right as a finance company and it sources wholesale funds from Australian Mortgage Securities (AMS) to lend to its broking arm's clients.

While NZ Finance is focused on increasing its broking capability, Callaghan says the real value of such distribution channels is being able to sell products through them rather than for their own sake, although they are profitable.

Staniland says banks used to handle all three arms of the industry - wholesale funding, mortgage management and distribution - but it is becoming more split up.

So has the market got it right? At 60c, Mike Pero shares are trading at 9.7 times this year's earnings if it meets its prospectus forecast.

NZ Finance shares are trading at 26.3 times 2005 earnings.

MIKE PERO MORTGAGES

Head office: Level 4, 186 Hereford St, Christchurch.

Management: Chief executive Jeff Staniland.

Results: The company reported an $802,061 first-half net profit and has forecast a nearly $1.6 million profit for the year ending June 30.

Market capitalisation: $15 million.

Major shareholders: George Gould with 54 per cent, Mike Pero with 6 per cent.

 

NEW ZEALAND FINANCE HOLDINGS

Head office: Level 6, 52 Swanson St, Auckland.

Management: Managing director John Callaghan.

Results: The company raised net profit 71.2 per cent to $2.8 million for the year ended March.

Market capitalisation: $76.7 million.

Major shareholders: John Callaghan with 24 per cent, executive director Mark Thornton with 22.1 per cent, non-executive director Pat O'Connor with 22.1 per cent and the Huljich family with 10.5 per cent.