Follow the Yellow Brick Road to wealth

Bumper half year results have this small lender brimming with confidence.

Yellow Brick Road (ASX: YBR) is not a company often covered by Foolish writers, as its small status tends to see it slip under the radar.

Regular Money magazine readers will be familiar with the name of its chairman, Mark Bouris, however, who routinely contributes to that magazine. He was also the founder of Wizard Home Loans — another household name — before selling that company to GE Money in the late 1990s. Yellow Brick Road is his latest venture; it was established in 2007 and listied on the ASX in 2008. Mr Bouris still holds roughly 22% of the company’s stock, with a further 15% being owned by banking partner Macquarie Bank (ASX: MQG).

In its latest half yearly result, Yellow Brick Road saw revenue from wealth management jump by 129% to 2.91 million, while income from lending was up 73% to 8.49 million. These are modest figures, but the scale of the growth is impressive and branch numbers are still increasing.

The management of Yellow Brick Road obviously feels confident, as management announced yesterday that it would begin an on-market share buyback, to commence no earlier than 26 March, and to last for no longer than 12 months. A maximum of 9.25% of the company’s shares on issue will be bought back at market price. Shares have risen 7% to 53.5 cents on the news, although the company is still a fair way short of its 52-week high of 67.5 cents.

Foolish takeaway

Share buybacks are often good news for a company and I think this will prove true for Yellow Brick Road. A company that has the same earnings but fewer shares on issue spreads those earnings around amongst a smaller number of shareholders, effectively increasing their earnings per share.

I do question the timing of the buyback however, considering the company is still trading at a considerable loss, but it could be that Yellow Brick Road is preparing to begin dividend payments in a couple of years. Another possible explanation is that the company’s losses will shrink considerably as branch-rollout expenses subside, which could see it begin earning a profit.

Investors should watch to see if its strong revenue growth continues over the next six months or so before making a decision to purchase.

 

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company mentioned.

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