Sweet smells from stale sales

Calculating the appropriate acquisition value of a broker or aggregator in the current market is essentially extremely difficult, as the mortgage market continues to contract and future revenue streams are impossible to forecast due to the current commission rationalisation.

Mark Flack, director at Firstfolio Limited, a minnow mortgage manager and originator which acquired six businesses during financial year 2008, said many of these business types have been on the market for some time, as owners are reacting to declining values and trying to bail out.

"One of the big mistakes they have made is that their cost base today reflects sales volumes from twelve months ago, and they have been too slow to make that cost adjustment.

"They have their revenue streams from their loan book trail and they are still making a profit, but their new volumes in a lot of cases are down by three quarters.

"So their trail, their only real asset, is now running off a lot faster on a net basis - so those businesses that don't adjust have a lifespan of only another two to three years."

Firstfolio is viewing the price weakness among peers as a buying opportunity.

"We have used the current circumstances to renegotiate and do some deals, and we have had opportunities that we would not have previously had."

Firstfolio chief executive officer Mark Forsyth adds that the tables have turned on many of the companies' acquisition targets of the past year, with some of these companies now chasing to be bought.

"Previously you couldn't have a sensible conversation with many of them, let alone get a sensible valuation, but the opportunities are much greater for us now."

Forsyth said the small-cap mortgage manager may consider bringing in some new capital, in the short term.

"We would like to tidy up the balance sheet and reduce some debt. The trade off with new capital though, is at what price."

Forsyth said in the short term Firstfolio already has  access to cash for acquisitions.

Due to acquisitions in financial year 2008, the non-current asset goodwill increased 25 per cent to $16 million, which Forsyth does not consider will be written down soon.

"We are having a constant debate with our auditors regarding the value of goodwill on the balance sheet, which we have just proved  should be maintained at the same level going forward, which we think is justifiable.

"The goodwill carrying amount is always a tough discussion with the auditors, but we are happy with the current value."