I've been taking an interest in Pepper's share price over the past week as I've been aware that there has been a round of redundancies at the company including some well paid staff in middle management. There has been no announcements regarding cost cutting (or anything from them recently) however the share price has had quite a bump in the past fortnight. I suspect someone/people are taking advantage of possible news around cost cutting becoming public in the near future.

I mentioned yesterday that I hold PPM along with Solvar as dividend plays in the financial sector. I think PPM is a compelling dividend stock for those to consider. Currently trading at $1.46 which is unbelievably only 8c higher than their book value!!!

At a present PE of 4.5 one can argue it could be a compelling buy even for those in search of CG if they can continue to grow.

Personally, I think it has been well oversold. With recent earnings of 33c and dividends of 14.4c the margin of safety with respect to dividend payment maintenance is present (something I like to look at when buying a dividend stock).

Although, it had some NIM compression in recent times I think the opportunity for growth in this area now that the banks have left provides opportunity for continued growth.

For those dividend investors, at $1.46 and a 0.144c you are looking at a fully franked 9.7% return + franking credits.

So if the market is wrong in its valuation of PPM and they continue to grow or even maintain their dividend in this present environment I think you can do much worse than a 9.7% annual return.

I should note entering 2023 there will possibly (most likely) be an increase in bad debts especially with respect to unsecured loans. However, if you are willing to ride out the next 12-18m then PPM could be an alternative to a high interest saving account for those with a stronger risk appetite.

Half yearly results up 29% from 56m to 72m (suggesting a PE ~10). With both loan originations and AUM both up. A good result considering NIM was reduced to 2.29 from 2.59 and they announced a $2.1m right off in their investment in Volt Bank. (Note I hold iRL). As I mentioned in my MAF straw both provide exposure to financial industry allowing for exposure to growth and dividend returns.

ASX announcement below.

https://newswire.iguana2.com/af5f4d73c1a54a33/announcements/ppm.asx/2A1392806/PPM_Announcement_2A1392806.pdf?download=1

News SummaryDJ Australian Non-Bank Lenders Eye 'Underserved Markets' -- InterviewPPM$2.22-$0.02 (-0.9%)$2.20$2.23

22 Apr 2022 11:47:101 ViewBy Alice Uribe

SYDNEY-- Australian non-bank lenders are positioning themselves to plug gaps in areas that have been vacated by major banks as they move to simplify their businesses, Pepper Money Ltd. Chief Executive Maro Rehayem said.

Mr. Rehayem said that non-bank lenders have been looking at opportunities in the asset-financing sector such as car loans that they can capitalize on. "What we deem, then, as the underserved segments of the market have really just been growing year-on-year," he told The Wall Street Journal. "Whether it's in mortgages, whether it's in the asset-financing industry, the banks have created more and more opportunities for the likes of Pepper to be able to capitalize on that."

"Sometimes when a bank sees a particular area that is too small for them to play, it is actually quite a substantial size for a business like Pepper and other non-banks, " the CEO added.

Over the past years, some of Australia's largest financial institutions have been simplifying their businesses and offloading non-core assets, maintaining a key focus on mortgages.

Australia & New Zealand Banking Group Ltd. in September 2020 completed the sale of its New Zealand-based asset-financing business, UDC Finance, to Shinsei Bank Ltd., which it said was in line with a simplification strategy. Westpac Banking Corp. in August 2021 finalized the sale of its own asset-financing subsidiary, Vendor Finance.

Mr. Rehayem said the level of credit assessment required for certain products can require a more "specialist view," which may not suit banks that are looking to streamline and reduce approval times for different loans.

In the first quarter of 2022, Pepper's mortgage originations sat at 1.9 billion Australian dollars (US$1.40 billion), up 54% from a year earlier. Its asset-finance business, meanwhile, delivered first-quarter originations of A$0.7 billion, up 78% on last year.

Loans for electric vehicles is an area where Pepper has had success. It provided loans for 11% of all EVs sold in Australia last year, making it the biggest lender in the country for EVs, said Mr. Rehayem.

"We looked at the EV market and we found no one was actually understanding it. Wherever there is no focus, we try and peel back and understand why there is no focus and try to create something out of it," he said.

As part of a wider strategy to widen its distribution footprint, Pepper this month announced plans to acquire 65% of Australian online direct-to-consumer asset finance broking platform Stratton Finance.

"Stratton does generate in excess of 19,000 leads per month. It gives us an opportunity to start introducing more products into Stratton outside of just car loans," he said.

On interest rates, Mr. Rehayem said the Reserve Bank of Australia could potentially raises its rate as early as May, but that Pepper's customers look able to manage this.

"When rates do rise, we are in a strong position. Our mortgage customers have an average of 290+ basis points serviceability buffer," he said.

"When coupled with household savings, which continue at rates significantly higher than the historic average, and unemployment at only 4%, customers are in a good position to continue to manage their financials," the CEO said.

Write to Alice Uribe at alice.uribe@wsj.com

(END) Dow Jones Newswires

Leading non-bank lender Pepper Money to acquire 65% of Stratton Finance - one of Australia's largest online asset finance brokers. Refer to ASX for in-depth info.

“Hidden” at the the announcement above was an update on the first quarter.

Mortgage Originations up 54% on the PCP. Closing AUM at 13B up 20% on PCP. Asset Finance Originations up 78% on the PCP. Closing AUM at 3.9B up 39% on PCP. Refer to ASX for additional info.

With the top 20 holding 96% I can see significant movements in this with further positive news at the HY results as the remaining 4% float representing only 11m shares.

I took a starter position in my personal portfolio and have sold off my AHI holding to start a position in my strawman account. As previously mentioned I am continue to review but, I am attracted to what looks like a significant growth profile, profit growth and dividend paying potential. The purchase of Stratton Finance adds to what looks like a possible significantly undervalued jewel.

Like others, I am attracted to this company based upon (apparent) value fundamentals and am in the early stages of ‘digging in’. But a macro view of the company is quite impressive.

I am a big believer in the answer to these two questions about any business, because they give you a good insight into the significant points of difference: “how are you different and better than your competition and why should I buy from you?”

 In this regard PPM stacks up very well:

Speed of Approval – aided by Advanced Technology

PPM are significantly faster than the major bankers in processing applications and issuing an acceptance. Try 72 hours versus the traditional banks at around 3 weeks for mortgage loans (approx. 70% of their biz). And auto loans as quick as 20 seconds!

Because of their size, I’d suggest they have the financial muscle to continue investing heavily into technology to keep (and extend) their leading edge here.

Speed of process Important to customers? Damn right it is! In some cases, speed of approval is more important than the rate and terms!

Size, accessibility & recognition

You might not have heard of PPM but the vast broker network which is responsible for the bulk of mortgage introductions have. Over 20 years some 20,000 brokers who are at the coal face making the recommendations to Mum & Dad are hooked into PPM with more joining each month. Yet PPM knows their marketplace and it is the borrower who will not be courted by the big 4 banks. They have carved out their niche.

So, great product offerings, great market reach and they have been so recognized by their peers over the last few years. The mantle place is full of #1 industry wide awards.

When the industry says you are the best, chances are strong that you are!   

But, having a good pipeline to the market with ‘in demand’ financial products is nothing unless they have access to cheap lines of credit where they have quality NIM (Net interest Margin or the difference between interest received per $1,000 face value of loan and the interest paid on that $1,000).

Again, this is a massive point of difference as PPM have the ability to syndicate loans and with access to over 100 institutional lenders. Indeed, PPM now have close on $16bn assets under management (loan book) on which they are making a margin.

So, yeah, the macro looks good. What I need to drill down on now are the risks involved because at face value the financial metrics are appealing. BUT,,,this is where I do believe I will fail because my circle of competence isn’t wide enough to cope with the vagaries of loans held outside the company (SPV’s), recourse and non-recourse loans, derivatives and hedging and currency translation movements.

 Final Comment (and decision): I will pass on this, but thought some of my observations might assist other Straw(wo)men!  

I'm in the same boat as @TEPCapital.

PPM was on my watchlist a while back, but I wrote it off because I didn't think they were in control of their destiny, being dependent on the interest rates at which they can secure financing to generate a healthy NIM.

The fact that they only operate in the ANZ market is also a negative for me.

Having said that the Livewire articles have encouraged me to look again. I do think PPM is an excellent company, growing it's portfolio of loan products on the back of a very smart servicing platform which was - and still is being - implemented by the software company that I work for.

Hi @NewbieHK,

I'm still in the deep dive stage myself, thus the small c. 1% starter position in my portfolio. As a starting point, these two articles from Katana Asset Management are definitely worth reading: https://www.livewiremarkets.com/stock_codes/asx-ppm

The first major risk is Net Interest Margin (NIM). In simple terms, NIM is the difference between what rate the lender is able to borrow the money at versus the rate they lend it at. Competition dictates the rate it is lent at, and this is generally less of the issue. The bigger question mark is around what cost they are able to borrow money in the wholesale markets. The second major risk for any lender is of course bad and doubtful debts (BDD).

Interestingly, as noted by Romano Sala Tenna: the fear around rising rates actually provides a tailwind, insomuch as the pressure on re-pricing the back book (loans previously written) is lower and re-financing also reduces which adds to the tenure of loans. Another risk may be the rise of Fintechs in this space. However, only a handful of fintech’s actually do the financing piece – and this is where the real margin is to be had.

The top 20 of PPM hold an extraordinary portion, something like 99% of all shares on issue (SOI). However, circa 60% is held by the number 1 shareholder, KKR. This is because Pepper Money was acquired by KKR for $657 million in November 2017 and was delisted from the ASX. On 25 May 2021, Pepper was then relisted on the ASX (Aus and NZ division). I'm not sure who the major sellers are at this stage, with the share price down significantly since listing, but I plan to find out.

On the surface, I agree that this looks very compelling from a valuation perspective. But, I've got more work to do and channel checks before I consider scaling up my position. Let me know what you find if you dig further.

Cheers,

What am I missing? I would be interested in hearing from the holders (2 on Strawman) on whats holding back the valuation? IPO price of 2.89 and today priced at 1.73 with 130m in NPAT (~29c/share) paying out a 9c dividend. At a PE ratio of ~5 I wonder if there are historical issues (I need to do more research) which have investors standing off!