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Why the Mortgage Choice Limited share price is printing 52-week lows

Mortgage broker franchisor Mortgage Choice Limited’s (ASX: MOC) share price fell 6.3% to close at a 52-week low of $1.11 on Thursday following a FY19 earnings guidance announcement.

Falling home loan settlements

Mortgage Choice revealed that it now expects home loan settlements will be around 10% lower than in FY18. Home loan settlements are a crucial indicator for the business as a decline in settlements lowers commission revenue which has a flow-on effect to the company’s other revenue lines.

As a consequence of a fall in home loan settlements, Mortgage Choice has revised its guidance for FY19 cash net profit after tax (NPAT) to be in the range of $14 million to $15 million. The company also noted that its statutory result for FY19 will reflect the decline in settlements and the year-end actuarial revaluation of its loan book.

Lower earnings

The market has reacted negatively to Thursday morning’s announcement as Mortgage Choice had previously expected FY19 cash NPAT to be around $16.5 million. Thus, the announcement represents a downward revision of roughly 12% at the midpoint.

The company has felt the impact of the slowing Australian property market with brokers noting that lenders are taking a longer time in processing loan applications because of tighter lending practices.

The highly publicized tightening of lending policies has been felt at Australia’s big 4 banks, Australia and New Zealand Banking Group (ASX: ANZ)Commonwealth Bank of Australia (ASX: CBA)National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) who have all underperformed the broader market in 2018.

Mortgage Choice also updated the market on its companywide change program by noting that it is on track to deliver a 10% decline in its operating cash expense base for FY19. However, it appears the cost cutting will not be sufficient to offset the decline in cash earnings.

Foolish takeaway

The Mortgage Choice share price has now fallen by around 55% over the last 12 months as the company has faced a cooling property market and its own franchising scandal similar to Retail Food Group Limited (ASX: RFG) and Domino’s Pizza Enterprises Ltd. (ASX: DMP).

Concerns have also been raised that mortgage broker fees could be subjected to regulatory scrutiny following the Banking Royal Commission. With Australia’s 2 largest property markets in Sydney and Melbourne continuing to see price falls and the outcome of the Royal Commission still to come, investors should probably consider looking for other opportunities on the Australian share market.

Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Domino's Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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