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Mortgage Advice Bureau (Holdings) PLC

Mortgage Advice Bureau Investment case – Zeus Capital Notes

Growth through the cycle

Mortgage Advice Bureau (Holdings) Plc (LON:MAB1) business model: We observe four attractive characteristics, which ensure MAB delivers predictable revenue, profit and dividend growth:

* Currently, the main driver of growth in MAB’s revenues, profits and dividends is the number of advisers employed or self-employed by its Appointed Representative firms (ARs);

* High cash conversion: operational cashflow is over 100% of post-tax profit;

* MAB is capital light: it is able to pay out 90% of reported earnings;

* MAB’s management team has a material equity interest.

Since its IPO in November 2014, MAB has grown the number of advisers by 20% 3-year CAGR to 1,008 LTM advisers (definition: “LTM advisers” is the average over the last twelve months).

The 3-year CAGR of MAB’s Group revenue and gross profit was 24% and of its profit after tax was 23%.

Forecasts: In 2016 MAB stated that it expects to achieve a minimum of 15% compound annual growth in adviser numbers over the next few years. Our forecasts are based on 15% growth in LTM advisers. For 2018 we expect:

* 18% yoy growth in gross profit to £30.4m (2017: £25.9m);

* Gross profit margin of 23.2% (2017: 23.8%);

* 16% yoy growth in PBT to £16.8m (2017: £14.5m);

* 16% rise in fully diluted EPS to 26.9p (consensus 2018: 26.5p 2017: 23.2p);

* 16% rise in the total DPS to 24.8p (consensus 2018: 24.6p; 2017: 21.4p)

For 2019, we expect fully diluted EPS to rise 16% to 28.7p (consensus: 30.7p).

Valuation: At 613p MAB shares are trading on a 3.5% historic dividend yield, a 22.8x current year 2018 PER and, with prospects of 16% growth in 2019, a Price-Earnings-Growth ratio of 1.4x. This valuation is consistent with our forecasts and a risk discount rate of 14%.

In our opinion, the quality of Mortgage Advice Bureau (Holdings) Plc’s growing cashflow, earnings and dividend stream, justifies a risk discount rate of 10%, which is consistent with a 761p share price. At 761p MAB shares would yield 3.3% based on a 24.8p DPS for 2018.