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).
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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.