Before COVID-19 hit the headlines, Glennon Capital held a significant position in non-bank lenders as we believed they would benefit in a post-Royal Commission world.
Unfortunately, COVID-19 meant people were temporarily unable to repay their debts and lenders were forced to defer repayments. Non-bank lenders suffered a big hit in share prices and we had to sell most of our financials to avoid big losses. However, we grimly held on to one key non-bank lender throughout called Resimac (ASX:RMC), and here’s why.
Investment thesis
We felt Resimac was one of the most likely non-bank lenders to survive a market downturn. It had a high quality majority-prime residential mortgage book in Australia, a diverse funding pool from Aussie and overseas banks, and a scalable loan servicing process offering quick turnaround times for borrowers. Most importantly, it had a strong and aligned Board led by Chairman Warren McLeland and an aligned major shareholder in Duncan Saville.
The Company didn’t disappoint us. Despite being one of our biggest performance detractors in March, the share price has rebounded strongly. The Company also settled two RMBS transactions in May and August, proving up the credit quality of its assets.
During the reporting season, Resimac delivered a strong FY20 result with profit growth of 79% from $31m to $56m. This was mainly attributed to 20% growth in lending off a relatively fixed cost base.
More upside potential
The market’s confidence in Resimac has now been restored. The share price has tripled from $0.44 in March to $1.37 after FY20 results were released. Just this month, the share price reached an all time high of $1.985 after Resimac provided a positive trading update.
We expect the Company to increase lending by 11% in FY21 over FY20. Furthermore, the proportion of customers who were deferring payments reduced from 10% in June 2020 to 4.4% in October 2020.
With this mixture of above-system growth and resilient credit quality, the Company is now priced on a forward PE of 8x. Hence despite strong share price appreciation since March 2020, we believe Resimac remains an undervalued way to play the COVID-19 recovery.
Conclusion
The number of COVID-19 cases in Australia is falling and newsflow around vaccine developments is accelerating a shift in sentiment towards cyclical companies that will benefit from an economic recovery.
Resimac is just one example of the type of stocks that we are populating our portfolio with: small, growing businesses offering great customer value propositions, run by aligned management, that will get an additional free kick from economic recovery.
Till next week happy investing,
Michael & Kenny
