Check this out.
The journos over at DataRoom at The Australian are saying that a private equity firm is tossing up whether to buy out non-bank lender Pepper Money [ASX:PPM].
This sticks out like the proverbial for me. Just the other month, I gave a presentation to my colleagues around this idea. I called it ‘Return of the jusen’.
The jusen were Japanese non-banks back in the 1980s that made mortgage loans.
They were able to grow their market share aggressively because they didn’t have the same regulatory handbrakes as the big Japanese banks at the time.
Just last week, the Australian Financial Review reported that the team at Citi were telling their clients buy Pepper and the other players in the sector.
Those are as Resimac [ASX:RMC], Liberty Financial [ASX:LFG], and Australian Financial Group [ASX:AFG].
Part of the rationale, at least according to the report, was that non-bank funding costs are improving relative to the big banks.
Asset quality might also surprise to the upside, considering the surprising resilience of the housing sector.
And in sympathy with the ‘jusen’ idea, non-banks might be able to pinch borrowers from the current crop of ‘mortgage prisoners’ looking to refinance in the market.
Non-banks can be more flexible around the interest rate buffer they apply and credit risk they are willing to take. The big banks focus on the prime borrowing market.
Perhaps most importantly of all, these businesses look very cheap, anyway you look at it.
The report in the AFR quotes fund manager Romano Sala Tenna of Katana Asset Management on Pepper Money.
He said:
‘If you look at valuations, the opportunity, their scale and cost of funding and track record over 20 years, this is a serious business fulfilling an important area in the market, and trading at 4 to 5 times earnings is ludicrous.’
I agree.
This is certainly not to say the idea is without risk. However, you have to think about how much negativity has been hammered into the share price.
I think he’s also correct to say Pepper’s management should be buying back stock at this valuation. They have the cash to do it.
As above, Pepper is not the only play here. Each business in the sector is not just a pure play on mortgages.
Pepper also has large and growing asset finance division.
AFG is a considerable mortgage broker. Resimac is chasing the same sector as Pepper, but currently at lower scale.
I put down five ‘bargain’ shares in a report I put out for Fat Tail Investment Research.
One of the non-banks was one of them. To find out more about it, go here to get it now.
Best wishes,
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Callum Newman,
Editor, Australian Small-Cap Investigator
PS: Here’s another clue around this. The Aussie share market copped a pasting late last week. These stocks looked resilient under the selling pressure.
