A path of gravel instead of gold
Yellow Brick Road shares are cheap, but they're cheap for a reason.
Yellow Brick Road (ASX:YBR) had everything going for it when it backdoor listed in 2010. A gap in the market existed because many non-bank lenders had pulled out after the GFC, providing an entry for an upstart like Yellow Brick Road.
Its founder, Mark Bouris, had been there and done that with Wizard home loans – founding and selling it for $500m in 2004 – and his profile could prove valuable in attracting franchisees. The company had Macquarie Group (ASX:MQG) and Nine Entertainment (ASX:NEC) behind it, adding financial support along with access to financial products and advertising slots.
Yet despite its privileged start, Yellow Brick Road's path has been paved with gravel instead of gold.
Since its first capital raising at $0.40, its share price has withered down to just $0.12 at the time of writing. There's value at this price and an activist investor could unlock it by breaking up the business. Selling Yellow Brick's mortgage trail commission book would recoup the purchase price, with further value from the 1620 strong network (that wrote $15.9bn of mortgages in FY2016) and a $1,276m funds management business.
Another way would be to take a sledgehammer to expenses.
But with Bouris, Macquarie and Nine Entertainment holding 54% of the shares, activist investors are unlikely to try. This means shareholders' returns will be dependent on the stewardship of current management, and that's probably the reason for the weak share price.
Shareholders are peeved because management is being enriched at their expense. Executive chairman Bouris has received $10m in total remuneration (including share-based payments) since 2011, which is excessive for a $40m company, let alone one that is yet to turn an annual profit or pay shareholders a dime. The company's costs are too high and it starts at the top.
Imagine how the chief executive of competitor Mortgage Choice (ASX:MOC) feels. He runs a business that is 7 times bigger (by market cap) and got paid half the base salary of Bouris in 2016.
Yellow Brick Road may also trade at a discount due to concerns that the industry may face a new wave of regulation in response to claims of lax lending standards.
Bouris pledged that he would fall on his sword if profitability was not reached in FY2017. Progress on this front has been made, with cost cuts and asset sales contributing to a small operating profit in the first half of 2017. Although we won't know if Bouris shared in the austerity until the FY2017 results.
Longer term, the industry could be a winner as demand for mortgages and financial products grows. But unless tangible evidence mounts that it is being run in the best interests of minority shareholders, we're likely to continue to give Yellow Brick Road a wide berth.
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