The housing market may be slowing but nobody has told the Mortgage Advice Bureau (LSE: MAB1). The broker’s share price is up 31% over the last year, and 116% over two. However, it has dipped today, falling 2.5%, on publication of a largely positive set of interim results for the six months to 30 June. What gives?
The Bureau
Today’s financial highlights included a 17% rise in revenue to £57.9m and a 9% rise in gross profits to £13m, while earnings per share (EPS) rose 11% to 11.7p. The disappointment was a dip in gross margins, from 24.1% to 22.5%, although this is hardly catastrophic. Its cash balance also dipped, from £13.2m to £12.5m.
Management could nonetheless boast of a “strong financial position with significant surplus above regulatory capital requirement”. This is a growing business too, with adviser numbers climbing 6% to 1,138 at 30 June, gross mortgage lending up 25% and market share of new mortgage lending up 12% to 4.7%. The interim dividend was lifted 12% to 10.6p giving a forward yield of 3.8%, with cover of 1.1.
Market fall
Peter Brodnicki, chief executive of the £319m AIM-listed company, said the company has posted “a clear outperformance against the housing market which has seen a 5% fall in the number of transactions,” helped by mortgage product transfers and protection sales.
I suspect investors may be worried about the group’s toppy valuation, a pricey 24.2 times forward earnings. City analysts are forecasting 9% earnings growth this year and 16% next, so Mortgage Advice Bureau could still justify its price, providing the housing market holds up. My Foolish colleague Kevin Godbold rates it highly.
China crisis?
Slowing or falling house prices will hit every business with exposure to the mortgage market, although £135bn global behemoth HSBC Holdings (LSE: HSBA) has some rather handy diversification. Unfortunately, it also has outsize exposure to China, which is a concern as President Trump’s trade war threats intensify, the emerging markets crisis threatens contagion, the yuan falls 10% and the country’s debt pile continues to roll up.
HSBC has been throwing money at its retail and investment banking units in Hong Kong and China, the region that generates the bulk of its profit growth. This helped to drive the 7% increase in operating expenses to $17.5bn, shown in its recent interims. Despite this, the bank still managed to post a 5% rise in interim pre-tax profits to $10.7bn.
Going cheap
The group also has exposure to a property meltdown, in this case Hong Kong residential, which is being squeezed by higher interest rates. Investment group CLSA recently predicted a 15% drop over the next 12 months.
Otherwise the bank is also putting past scandals behind it, following the $765m settlement-in-principle to resolve the US Department of Justice’s civil claims over residential mortgage-backed securities.
Bargain price
Peter Stephens reckons that HSBC’s long-term pivot to Asia will pay off in the longer run, while I admire its low valuation of just 11.9 times earnings, combined with a whopping forecast yield of 5.9%, covered 1.4 times. With the bank’s EPS forecast to rise 53% this year, then 5% in 2019, the 7% share price drop over the last 12 months looks like an opportunity to buy.