U.K.-based Mortgage Advice Bureau (LSE:MAB1, Financial) appears to be another quality gem that we landed on this year. It looked a bit underdiscovered to many value investors, thanks to its small market cap (a little over 330 million pounds ($431.8 million)) and niche focus. Regardless, the business delivers a superior return capital, runs through a capital-light, highly-scalable model, generates robust cash flow, pursues a clear growth path and is founder-led – all of the characteristics that point to superior investability.
Mortgage Advice Bureau was the first, and currently, still the only mortgage intermediary trading publicly in the U.K. With over 1,400 advisors across the country, the company engages in the provision of mortgage advice as well as advice on protection and general insurance products to customers. It sounds like a straightforward agency kind of business that is driven by human capital. However, what makes the company unique is that it rarely has the need to face customers itself. Instead, the very majority of those 1,400 advisors are hired by so-called "appointed representatives" (the firms that really conduct the broker work on the ground) that have a franchise-style partnership with Mortgage Advice Bureau.
According to management, a typical contract (between the company and the appointed representative) lasts more than five years, and the renewal rate is high thanks to the company's reputation for quality, innovation and support. Throughout the partnership, Mortgage Advice Bureau shares the revenue across the network of appointed representatives (amounting to over 170 at the moment) mainly in terms of procuration fees from mortgage lenders (45% of fiscal 2019 revenue), insurance commissions (39%) and client fees (14%). In return, these appointed representatives receive mortgage and insurance panels as well as business support regarding technology, compliance, training and marketing from the company. Notably, Mortgage Advice Bureau does engage a small number of advisors itself, mostly through First Mortgage Direct, the subsidiary that the company acquired in 2019.
Mortgage Advice Bureau was founded by current CEO Peter Brodnicki in 2000. The company went public in 2014. The founder still owns a 27% equity stake. Also on the major shareholder list are two of the prominent value investing asset manager, U.K.-based Liontrust Investment Partners and California-based Kayne Anderson Rudnick Investment Management.
A quick glance at the financials should echo our judgment of the superior quality of the business – since the initial public offering, the company's return on invested capital has always been north of 50%, while also generating a double-digit free cash flow margin and no debt. The company has demonstrated its ability to convert one dollar of net profit into more than one dollar of free cash flow, as all income streams are paid directly to the company before being distributed to appointed representatives (after the deduction of revenue share plus the retention of another 5% for the protection against clawbacks). In the meantime, we observe that Mortgage Advice Bureau typically consumes less than 1% of its annual sales to fund capital expenditures. Essentially, the company does not seem to have a lot to capitalize – all technology development is treated as an expense; the company does not even permit corporate vehicles (think thrift here); the only significant capital investment is in computer equipment at the moment.
For the last five years, Mortgage Advice Bureau increased its revenue and earnings annually by 21% and 22%, which apparently outperformed the total U.K. mortgage lending and housing markets. Per the management, the business now possesses a nearly 6% market share (significantly up from 3.6% in 2015) and enjoys a leading brand awareness (i.e., 21% versus 16% at L&C or 8% at Habito). Moving forward, management has laid out a clear growth strategy through the expansion of the advisor network, the increase in revenue per advisor, the development of new services and a broadened total addressable market. The company also appears eager to stay at the forefront of any technology transformation in the mortgage space by looking to be an early adopter of emerging technologies and spending considerably on investments in this regard (including the company's in-house platform, compared to mostly outsourced solutions at major peers).
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
Read more here:
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