Mortgage Choice Limited: Profits down, shares hammered, market no fool

About Latest Posts Mike KingMike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than …

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mortgage Choice Limited (ASX: MOC) released an announcement to the ASX at 6.30pm on Friday night, downgrading first half 2012 profits by 25%,with full year results expected to be down by 10-15%, compared to previous year. The shares slumped 14 per cent on Monday morning.

I'm always suspicious about a company releasing results on a Friday night, after market close. I'm also suspicious about a company releasing a profit downgrade, without mentioning any dollar amounts, just percentage changes. It means investors have to go and research their last half and full year results to actually work out what the actual net profit will be. I've saved you some time by detailing my estimates here.

Note that Mortgage Choice reports two sets of financials, one on a cash basis and another on International Financial Reporting Standards (IFRS) basis. The main difference between the two is that under IFRS, Mortgage Choice include adjustments to the valuation of their trailing commissions in the net profit figures. Cash profit is a more realistic figure of what the company actually made in profits/losses for the year.

On a cash basis, I expect net profit to be around $6.6m, compared to $8.8m in the six months to December 2010.

For the full year, I expect net profit to be between $12.2m and $14.3m, on a cash basis compared to $15.9m in 2011.

Mortgage Choice stated that net profits for the half to December 2011 would be down primarily because the company spent much of its marketing budget in the first half (rather than spread throughout the year). The second reason was higher expenses in FY 2012 compared to FY 2011 due to changes in timing of its National Conference and reward and recognition events, which were not held in 2011 but instead held in 2012.

About Mortgage Choice, the company

Mortgage Choice is a mortgage broking company. They provide assistance to borrowers in selecting and submitting home loan applications. The company's income consists of up-front commissions paid at the time of the loan, and a trailing commission, which is paid over the life of the loan.

They do not provide finance to borrowers themselves, merely acting as a broker between the borrower and a lender. The big four banks, namely Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) provide 61% of all loans sourced. 29% is provided by the smaller regional banks (Source: Mortgage Choice presentation – 24th August 2011).

Class action coming?

It seems to me that Mortgage Choice knew about these issues some time ago, and the effects it would have on first half and full year 2012 profits, so I question whether they have met the ASX guidelines for reporting significant changes in expected financial results as soon as they become aware of them.

It wouldn't surprise me at all to see a shareholder class action resulting from this alleging non-compliance with ASX and ASIC guidelines.

Share price hammered

In early Monday trading, Mortgage Choice shares are down 14 per cent. The severity of the downgrade will have a major impact, and the fact that the market is not stupid, and doesn't like downgrades after market close on a Friday.

This announcement will also be a blow to shareholder's confidence in management. It could have been worded better, and actual profit figures released. As a shareholder, I must say that I'm very disappointed in management.

I will be reviewing my holdings in the company later this week (Motley Fool trading rules don't allow me to trade my Mortgage Choice shares for two full market days after this article).

Attention: Are you are looking for investing ideas for 2012? Request our free reportThe Motley Fool's Top Stock For 2012Click here, whilst it's still free and available.

 More reading

 Motley Fool contributor Mike King owns shares in Mortgage Choice. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »