Have I just found my new favourite FTSE 250 share in specialist mortgage lender OSB Group (LSE: OSB)? It certainly looks like it.
OSB takes retail deposits through savings franchises Kent Reliance and Charter Savings Bank, and lends them to specialist sectors of the mortgage market such as buy-to-let, the self-employed, adverse credit, and commercial.
It’s a medium-sized business with a market cap of £1.47bn, but has flown under my radar until now. The shares are actually up 20% in the last year. In the last month, they’ve crashed 20%.
My ears always prick up when a good stock tanks. However, recent experience has told me to tread carefully around volatile shares. In the last year, I’ve bought Diageo, JD Sports Fashion, and Burberry Group after profit warnings. Unfortunately, only JD Sports Fashion has proven a success so far. Burberry is down a painful 40%.
Is OBS Group a bargain buy?
The OBS crash was triggered by a poorly received set of half-year results on 15 August, yet there were positives in there, too. Underlying profit before tax more than doubled to £249.9m, while statutory profit tripled from £76.7m to £241.3m.
However, on closer inspection those numbers were a little misleading, as OSB suffered one-off adverse movements in the prior year.
There was another issue. The board had forecast full-year net interest margins of 250 basis points, but cut them to between 230 and 240, amid increased mortgage market competition. It’s not a huge cut, but that’s a key metric.
Underlying return on equity climbed to 18% but net loan book growth was modest at 1.5%, “slightly lower than originally guided as we prioritised returns over growth”, according to CEO Andy Golding.
High income, low valuation
Personally, I’m concerned about the outlook for the buy-to-let market, where OSB is a leading light, writing 9% of all new mortgages. Labour’s forthcoming Renters’ Rights bill is spooking landlords and many are selling up, while new entrants may be deterred.
Golding says OBS faces “increased competition in the subdued mortgage market”, which doesn’t augur well either. So I can see why investors are concerned.
Its balance sheet remains solid with a common equity tier 1 capital ratio of 16.2%, up slightly from 16.1% at the end of last year. That includes the impact of a £50m share buyback, announced in March, mostly completed by mid-August.
The shares look staggeringly cheap trading at just 5.13 times earnings. And the trailing yield of 8.29% is a stonker. Especially since the board hiked first-half dividends 5% to 10.7p per share, in line with its policy. It also approved a new £50m share buyback, which began on 6 September.
There are more risks than I hoped but given the low valuation and mighty yield, I can live with that. I’m worried that upcoming interest rate cuts could squeeze margins further, but with underlying net loan book growth forecast to hit 3% for 2024, I’m planning to buy it anyway. It seems too good to miss today.
The post Down 20% in a month with a yield of 8% and P/E of 5! Is this my perfect FTSE 250 share? appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
