RHG has been a really solid trade for a few fund managers I know, and so far happily for me too. RHG was formerly known as RAMS Mortgage Corporation and Australian readers of this blog might recognise this chap from advertisements:
I don't know why they chose a ram. My parents once had a hobby farm and let me assure you they were never this friendly and were usually looking for a fight. It may have been an attempt to differentiate a very commoditised and generic product, just like insurance comparison websites are attempting to do with meerkats:
or half-wits:
Anyway, as a very quick history, Rams floated in 2007 and then immediately blew-up as the credit markets dissolved during the GFC. The RAMS business was sold and the mortgage book placed into run-down mode and renamed RHG. The run-down has been proceeding well and shareholders have already received chunks of cash along the way. As noted in previous posts, in order to see if money can be made from this type of cigar-butt, an assessment should be made of the discounted cash-flows as the mortgage book winds-down.
The way I calculated it was to go back through half and full year company reports and work out an average historical Net Interest Margin (NIM) which I calculated as 2.1% and the average annual historical wind-down rate of the mortgage book which I calculated as 30%. These figures allow the estimation of gross-margin (interest received from mortgage book less wholesale interest paid to finance the mortgage book). Probably the bigger guess was future operating costs which again I took the lead from historical financials and then reduced each year out until 2017 when the book should be close to fully wound-up. There were some further calculations including other interest earned, tax and so forth. Bung this all into a spreadsheet and I arrived at a post-tax NTA of 52c and pre-tax NTA of 64c. Please note the disclaimer at the right of this page. These are my estimations only and should not be relied upon.
I could be wrong. I calculated these figures in March, and we will soon have six month figures to June so it will be interesting to update the model and see if those assumptions are still valid. Regardless, I think the numbers are fairly right as recently there has been a good old-fashioned bidding war emerge for RHG at prices close to my valuation. The latest firm bid (15 July) is 48c excluding the recent ex 3c fully franked dividend.
One man's trash is another man's treasure...
Even if my numbers are right, it doesn't mean there won't be another increased offer. A new owner may be able to shrink overheads faster, work the book harder or even start offering new loans to existing borrowers (if possible). The other big factor is tax. The bid may be sweetened if it is re-configured to include a nice big fully franked dividend. Low tax paying entities such as SMSF's would love this.
But I am now speculating as to what might happen. Some left field event could come along and everything could go pear-shaped. My logic for buying and holding is value. It will be even nicer to realise that value sooner rather than later with a cash takeover.
Disclosure: own RHG
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