The 1H FY2025 results for mortgage broker aggregator and loan provider Australian Finance Group (ASX: AFG) showed improvement after a period of increased competition from banks and higher funding costs that squeezed the group’s margins.
Following my introduction to Australian Finance Group in January, the RBA cut their Cash Rate Target by 25 basis points to 4.1% p.a. on 19 February. This appears to have stoked housing sentiment, which should see an increase in mortgage holders and new buyers contacting their mortgage broker.
If rates continue to fall, investors could be attracted to the group’s dividend yield of 4.7%, fully franked at the current Australian Finance Group share price of $1.66.
Australian Finance Group 1H FY2025 Profit Results
Group revenue over the six months to 31 December 2024 was up 11% on 1H FY2024 to $626 million, though Net Profit Before Tax (NPBT) was down 1.3% to $22.3 million. Operating costs were up 8%, due to increased employee costs as the Group looked to enhance its technology offering and undertook new strategic initiatives.
The fully franked interim dividend of 3.8 cents was down 5% on 1H FY2024.
Free cash flow for this business was $13.4 million, calculated by taking net cash flow from operations of $13.5 million minus expenditure on property, plant, and equipment of $0.1 million. Of course, this ignores the use of external capital to fund the actual loans made!
As at 31 December 2024, Australian Finance Group was well positioned with net cash of $185 million in unrestricted cash, investments and trail book.
Loan Distribution Segment
The distribution segment provides mortgage broker aggregation services. This segment accounts for 82% of the total revenue and continues to grow steadily.
Gross profit was up 8% to $28.9 million, underpinned by record residential settlements of $31.8 billion, up 13% on 1H FY2024.
Brokers under the group increased to 4,100 from 4,039 over the six-month period – an encouraging sign.
The upfront broker payout percentage was higher over the half to 96.3% from 96.1% in the previous half, and up 0.3% from the 1H FY2024 percentage of 96.0%. This highlights the constant fine line of an ideally lower payout ratio and keeping high volume brokers.
Australian Finance Group also offers brokers subscriptions to additional platforms. While this only generates a small fraction of overall revenue, it is an additional value proposition and a growing source of recurring revenue.
Subscription income from these additional platforms hit a new high at $10.1 million, up 12% compared to 1H FY2024.
The additional platforms include the BrokerEngine platform – workflow software that helps mortgage brokers automate and streamline tasks and manage their clients and teams. BrokerEngine has 3,300 subscribers, up from 2,500 in 1H FY2024. 700 of those brokers are not with Australian Finance Group, providing an additional medium for direct marketing.
AFG also offers marketing services to its brokers. Utilisation of this service fell to 44% in 1H FY2025, down from 47% in 1H FY2023. This may be due to Artificial Intelligence apps that can help with marketing, and the younger generation being more social media savvy.
58% of Australian Finance Group brokers now write more than one product, up from 54% in 1H FY2020 – hardly a rapid uptake. These products include leasing, asset finance, and personal loans. It is an extra service for Australian Finance Group to offer brokers when a client may request it.
Australian Finance Group has a small ‘diversified products’ offering, with leasing and asset financing both experiencing growth. Asset finance settlements hit a new high of $1.8 billion in 1H FY2025, up 12% from 1H FY2024. In December 2024, AFG acquired the remaining stake in asset finance aggregator, Fintelligence, to now own 100% of the platform.
Better technology and new platforms may enable mortgage brokers to offer more than just home loans in the future.
During the half, Australian Finance Group acquired stakes in two broker businesses that use the group’s aggregator services – Lifespan Investment, and Empower Wealth Mortgage Advisory.
With many broker groups under its umbrella, Australian Finance Group can identify the top-performing brokerages and will be familiar with their management. Partnering through equity investments and helping brokerages grow makes sense.
It also helps to increase loyalty – mortgage broking is a tough business, and the top brokers bring in an outsized amount of commission, so keeping them with Australian Finance Group is critical.
The Chief Financial Officer advised in the results webcast that management would generally look at taking between 20-40% stakes in the bigger firms, hoping for 4-8% p.a returns – “closer to 4%,” at the beginning. Obviously, this sort of growth by acquisition is capital intensive!
Loan Manufacturing Segment
The second segment, Manufacturing, offers Australian Finance Group’s own home loans. This segment accounts for 18% of group revenue. Net Profit Before Tax (NPBT) was $8.4 million, down 3% on 1H FY2024.
The loan book reached $5.1 billion, up 23% on the prior corresponding period (pcp), with record securities settlements, up 147% from the pcp. However, the lower Net Interest Margin (NIM) and Thinktank detracted from profit.
Australian Finance Group owns 32% of Thinktank, which provides commercial and residential loans, SMSF and private loans, and broker aggregation services.
Thinktank’s loan book grew 10% to $6.4 billion, but the earnings were lower at $0.4 million, down 73% on 1H FY2024, affected by a lower NIM.
The segment’s record loan book, improving NIM versus 2H FY2024, and a reduction in losses should position the segment for growth after declining in the last two financial years.
The Net Interest Margin (NIM) improved over the period. At the end of H1 FY2025 NIM stood at 114 basis points (bps) 4.6% higher than 30 June 2024 (109bps). While this improvement is welcome, it remains below the historical average of 133bps.
Australian Finance Group (ASX: AFG) Outlook Following Half-Year Results
Housing market sentiment could continue to improve if interest rates drop further. Improved sentiment, coupled with the increase in brokers under AFG, could lead to a rise in settlements.
Following the RBA’s February rate cut, property market data provider, Corelogic, revealed that house prices in Sydney and Melbourne rose 0.3% in February and 0.4% in March. This followed three months of declines. While the RBA left the cash rate unchanged in the April meeting, some economists predict more reductions could come if the trade war slows growth and consumer sentiment declines.
It pays to remember that while interest rates did increase sharply, they are now closer to historic averages and may not come back down to historic lows seen a few years ago.
All this has led to improving NIM and increasing take up of loans, which has helped return the manufacturing division to growth.
CEO David Bailey quotes:
“In a further sign of an improved funding environment, our recent non-conforming Residential Mortgage- Backed Securities transaction, AFG 2025-1NC, due to settle in early March 2025, has revealed cost of funds trending down. Strong support from new and returning local and international investors enabled the issue to be upsized from $500 million to $700 million to further fuel the growth in this part of our business.”
Distribution appears to be going well, and as the segment scales, it should be able to offer a better experience than smaller aggregators. Any adverse impacts to profit will likely be from external factors. Of course, this segment would likely suffer badly in a housing price crash.
Summary of the Australian Finance Group (ASX: AFG) H1 FY 2025 Half-Year Results
I am happy to see the Distribution segment’s continued steady growth, underpinned by increasing brokers, and record settlement. The increasing uptake of extra services by brokers provides additional recurring revenue.
The Manufacturing segment, which has seen declining profits in recent years, appears to be returning to growth as competitive pressures ease, settlements rise, and the NIM improved slightly on the previous six-month period.
The dividend, while down slightly, still provides a grossed-up yield of 7.14%. I (Chris Coe here) expect the dividend and profits to return to growth in this business, driven by improving conditions.
The half-year results have not revealed anything to change my view of a turnaround for Australian Finance Group. Growth may be incremental and unpredictable, being somewhat dependent on Reserve Bank interest rate policy and the housing market, but for now, it appears to be on track, and I am happy to receive a decent dividend yield in the meantime.
Disclosure: The author of this article owns shares in AFG and will not trade shares for at least 2 days following the publication of this article. One of the editors of this article, Patrick Poke, does not own shares in AFG, and will not trade shares for at least 2 days following the publication of this article. One of the editors of this article, Claude Walker, owns shares in AFG, and will not trade shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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