Here is the report:
Warburg Dillon Read LLC March 12, 1999
Thomas R Hain (212) 821-2407
Finet Holdings (FNHC - OTC) - Buy
FNHC: INITIATING COVERAGE WITH A BUY RECOMMENDATION
Business: Online Mortgage Finance
Price: 2.03
Price Target: 5.00
52 Week: 4.19 - 0.41
Dividend: nil
Yield: nil
5 yr EGR: 40 %
Mkt Cap: 154 m
Shrs O/S: 75.8 m
BV/Shr: 0.19
Debt/TC:
ROE:
LTM OCF:
CV Sec: No
FY Quarterly Estimates
1Q 2Q 3Q 4Q
1999: -0.08 A -0.15 A -0.02 A -0.06 E
2000: -0.05 E -0.03 E -0.02 E 0.00 E
2001: 0.00 E 0.01 E 0.02 E 0.03 E
Fiscal Year Estimates
Prior EPS P/E Rev(m)
4/1997A: -0.02 NM 8.2
4/1998A: -0.03 NM 9.4
4/1999E: -0.31 NM 12.2
4/2000E: -0.09 NM 24.7
4/2001E: 0.06 33.8 41.3
Summary:
We are initiating coverage of FiNet Holdings with a Buy recommendation and a 12-month price target of $5. FiNet is a little known mortgage broker and banker that is competing in the explosive on-line mortgage origination channel. Today, through its suite of services, products, and web sites, FiNet offers virtually every service offered by high profile competitors and, in our opinion, much more. Looking to the future of internet mortgage banking, we also think FiNet has a well thought-out winning strategy.
Highlights:
From a base of essentially zero in 1997, it is believed that in December 1998 alone, industry-wide on-line mortgage originations were roughly $800 million. In total, we estimate the on-line mortgage market was roughly $5 billion in 1998 and should easily reach $10 billion in 1999. This represents a minuscule part -less than 1% - of the $1.5 trillion market in 1998, but therein lies the opportunity.
The potential growth rates in the on-line mortgage business are very compelling, particularly for on-line mortgage market leaders such as Home Shark, E-Loan, HomeAdvisor, and FiNet. For example, we think FiNet‘s fee for loan referral service "iQualify" could grow from 150 referrals in the most recent quarter to over 550 in the quarter ending April 2000. While not all "on-line" loans, we think the company could increase loan originations from an estimated $1.4 billion in fiscal 1999 to $2.5 billion in fiscal 2000.
Opportune investment timing. As virtually the only publicly traded on-line mortgage company, FiNet offers the opportunity to be an early stage investor in the on-line mortgage sector and to benefit from substantial investments over the last five years. Technology investments have been made, a revenue track record exists, and we think profitability and positive cash flow are just around the corner.
Established and experienced mortgage bank. FiNet has unmatched experience as a mortgage broker, mortgage banker, and internet technologist. The company is an established, full product mortgage bank, whose core banking operation is profitable. The company was a pioneer in the use of desktop underwriting and its web sites have won prestigious technology awards.
Branding war. FiNet is clearly behind competitors in the branding war. However, to address this, the company is pursuing an effective "alliance" or co-branding strategy whereby on-line and off-line partners are driving volume to FiNet‘s sites. The recent addition of $13.9 million in equity could facilitate new on-line advertising and marketing opportunities should the company choose that option.
Considerable management depth. FiNet, which has a history of strong marketing and technology management, recently added a number of heavy hitters in the mortgage banking operations, financial management, and secondary markets side of the business. The new managers have been well incentivized. The top five managers own roughly 1.1 million shares, have been granted an additional 0.5 million which vest over four years, and own options on 3.0 million more which vest over the next four years.
The company trades today at roughly 5.9 times estimated forward revenues. We estimate a sample of other internet financial companies trade at between 6 and 30 times forward revenues with an average of 14 times. Based on the overall company turning profitable and cash flow positive in the quarter ending April 2000, and based on a 9 to 10 multiple on our conservative forward revenue estimate, we think this company could be worth between $5 and $5.50 a little over a year from now.
Risks. We think investors should note that the company could remain in a negative cash flow position for the next four to five quarters (the company estimates it could burn through as much as 70% of its existing capital). Next, the sector is heating up quickly and the company‘s costs of driving traffic are difficult to project. Finally, volatility in the stock price has been significant, in part because of the limited float of stock. |
