Osb Share Discussion Threads

[pj84] 14/11/2023 19:24

We sold this bank, then the shares lost 25pc – now we’ll buy again

Questor share tip: buy-to-let specialist does not deserve to be lumped in with lowly valued high street giants

By
Algy Hall
13 November 2023 • 6:00am

In March, Questor advised readers to sell OSB and was right to do so – shares in the specialist buy-to-let mortgage lender have lost a quarter of their value since.

This column is relieved to have sold before a profits warning in July that sent OSB shares tumbling. The lender disclosed a £180m hit because mortgage borrowers were refinancing more quickly. Broader investor unease about the banking sector, which prompted our advice to sell, has meanwhile persisted.

Now, however, we’re recommending the shares again, guided by the investment decisions of some of the world’s best-performing fund managers.

Ten of these professional investors – each among the top-performing 3pc of the 10,000 equity fund managers tracked by the financial publisher Citywire – own shares in OSB. As a result the stock is rated AA – just below a top AAA rating – by Citywire Elite Companies, which rates companies on the basis of their backing by the best-performing fund managers.

What’s more, many of those investors have been adding to their stakes over the past few months. They include Matthew Tillett, who bought more shares for his Premier Miton UK Value Opportunities fund in July. Tillett took over the fund in November last year after delivering four times the market return over three years on the fund he ran before.

He told his investors that shares in specialist lenders such as OSB were trading on valuations as low as those of Britain’s biggest banks, yet they were “less dependent on the interest rate environment to sustain high levels of profitability”.

Trading at just 0.6 times forecast book value, shares in OSB are close to the cheapest they have ever been on that measure and 30pc cheaper than when we advised readers to sell in March. A forecast dividend yield over the next 12 months that stood at 7.1pc when we sold has meanwhile climbed to 9.9pc – a level that suggests the market expects a cut.

But a trading update earlier this month indicates that the bank may be putting its problems behind it. There was no worsening of the situation that caused that big hit to profits from earlier in the year, when OSB was burned by borrowers spending less time between fixed-rate mortgages on stop-gap “reversion” rates that are lucrative for the bank.

Reassuringly, it left unchanged guidance for this year’s underlying “net interest margin” – the difference between the interest rates a bank earns on the loans that it makes and the rates it pays to depositors – at 2.6 percentage points. That would mark a recovery from the first half of the year, when the hit to profits resulted in a slump from 3 percentage points to 2.


That’s not to downplay the difficult trading conditions for banks and the particular challenges posed by the buy-to-let market, in which OSB specialises.

With interest rates starting to plateau, heightened competition between banks is curtailing rates on loans while the rates banks need to offer to attract depositors are rising. Increasing bad debts after the surge in mortgage costs, coupled with the impact of tightening regulation on the buy-to-let market, are adding to investors’ fears.

But OSB appears to be coping well with the pressures. Alongside the maintained net interest margin guidance, the bank reported a 5pc increase in deposits in the three months to the end of September. But the biggest positive from the third quarter was lending growth.

OSB reported that in the first nine months of the year it had achieved 7pc loan growth. This was previously the target for the whole of 2023 and guidance for the year has now been raised to 9pc.

Its ability to win market share thanks to its specialist focus is a key long-term attraction. It is also a reason to think it could weather tougher markets better than most as the specialist focus is reflected in the bank’s strong reputation for risk management.

On this front, there’s reassurance from low levels of problem loans and average rent-to-interest cover of 178pc on OSB loans and 154pc for its Charter Court Financial brand, which accounts for about 45pc of gross lending. Meanwhile, a scarcity of rental properties makes landlords well placed to pass rising interest costs on to tenants.

OSB’s resilience should also be helped by its bias to professional landlords who use corporate structures to secure tax and property management advantages.

This buy-to-let specialism keeps costs down compared with mainstream banks. OSB expects its costs to amount to around a third of its income this year, compared with more than half for many larger rivals.

The branchless bank’s low-cost model underpins its attractive levels of return on tangible equity. Even after the profit hit in the first half of this year, analysts expect the metric to reach 15.2pc in 2023 before rebounding to the high teens from next year.

It is not hard to see why, following the slump in the shares this year, top fund managers are betting that OSB’s valuation offers protection from further share price falls and the potential for significant gains should the third-quarter results prove to be a taste of things to come.

Questor says: buy
Ticker: OSB
Share price at close: 347.2p

[apple53] 03/11/2023 21:37

I will regret selling any at all. I am a dupe for relative value. But I continue to believe OSB is worth £8-10.
In the early years, however, I didn't trade it, and missed a number of spikes and 20-30% reversals. On balance I have done well trading it since, selling quite a lot shortly before the recent collapse. I would probably trade it more if it weren't for Stamp.

[lord gnome] 03/11/2023 17:31

Hi apple53. I bought back most of my OSB position today. A costly episode. I console myself with the tale that I was protecting the downside. :-(
I'm with you on STB. I'm just waiting for it to bottom out. I've already been waiting a long time.

[apple53] 03/11/2023 16:58

Lord Gnome - very sorry to hear.
My bad luck was less bad. Went for it in size at 320 and 300 (in addition to large old position), and had pretty much no ammunition for sub 280, though if I had paid attention to PIN I would have sold PIN at 305 and bought OSB at 280 and looked like a rockstar.
I have sold maybe 20% of my position today at average of 351, primarily to switch to STB, which is due a spike.

[parob] 03/11/2023 14:07

Very strong recovery and the possibility of 4 big white candles taking us all the way to 400p.

[thebutler] 03/11/2023 12:51

Nice to see a director buying 25,000 shares. All looking good here.

[flyfisher] 03/11/2023 09:38

Loan book growth of 3% over the quarter, against a declining quarter for property values, suggests that the products are currently attractive.

They had £4.2bn of TFSME debt to repay over the next 2 years. Attracting new retail deposits has allowed them to make a start on this, and at sub sonia..

OSB will need to access the bond market in 2024, bond rates moderated yesterday after the BOE kept base rate stable, which is a help.

[parob] 03/11/2023 08:54

Exactly. There's resistance at 400p but hopefully it powers through this time as markets turn bullish; interest rates will come down down at some point, helping stocks to recover. Market is forward looking.

[eigthwonder] 03/11/2023 08:50

thing is - if they hold the dividend this is cheap quality in a cheap sector. Solid buy even after the rebound

[parob] 03/11/2023 08:22

Think this is helpingBerenberg RAISES OSB Group price target to 720p. BUY

[brucie5] 02/11/2023 17:06

Still somewhat at a loss but happy to have accumulated. This seems well run and able to weather the storm.

[thebutler] 02/11/2023 13:56

I think this rise has also been helped by the buy back, taking out a ton of shares from the Market so buyers having to scramble for shares. Lovely jubbly!

[flyfisher] 02/11/2023 09:55

Well timed catabrit.

[blackhorse23] 02/11/2023 08:16

Switched to GATC , best dividend yield in LSE

[thebutler] 02/11/2023 08:14

Very good update. Hopefully the start of a recovery to former highs.

[catabrit] 26/10/2023 15:08

Nibbled at this yesterday.

[broomrigg] 13/10/2023 10:41

......thebutler opens his mouth and the collapse resumes. His first advice to you all was OSB are "a steal" at 5 quid, then when the shares DROP 2 QUID he says "looking very good here". You just couldn't make it up.....what an utterly useless clown.

[thebutler] 12/10/2023 11:49

Looking very good here. Confident it's bottomed out. Took a few grand at 298p which seems to be paying off.

[broomrigg] 03/10/2023 16:44

thebutler forgot to include he thought this was a bargain ("a steal") at 500p.What a thick useless bellend.Lollllllllll

[apple53] 03/10/2023 14:07

I wonder if there is an element of anticipation of end of buybacks. I wonder if they can find some more cash, NB this from half-year statement

"The Board is confident that the Group’s strategy and proven capital generation capability can support both strong net loan book growth and further capital returns to shareholders."

3x forward earnings.
24 and 25 forecasts have NOT been cut, despite a) 23 profit warning, b) knock-on effect of the type of issue that caused profit warning, ie there should be lower revenue recognition on new mortgages, c) increase in funding costs, etc.
So either analysts are dopey and we have some cuts to come (which are just a teensy bit priced in), or.....

In any event it would take a massive earnings hit to justify £3.

What it comes down to is that there is no marginal buyer. Too small for institutions, and retail investors may not understand the impact of an extremely low cost income ratio (ie much less bottom line impact from bad new). Charter Court deal was prescient I guess otherwise they would be even further from the radar screen.

Well I've just increased my position by almost 50%, and so I've repurchased more than I sold between 4.6 and 5.6. Extracted the cash from ICGT, which has recovered modestly. Admittedly ICGT remains very cheap (30%+ discount), but OSB is at a 50-70% discount to 'fair value', and the PE investment trusts seem to be oscillating between 30 and 45% discounts at the moment. Remarkably, I sold ICGT at a profit.

I suppose OSB could get taken private.
Can anyone make a guess for a takeover?

[thebutler] 03/10/2023 13:35

God only knows.

I thought it was a bargain at 400p

Then I thought it was a bargain at 380p

Then I thought it was a bargain at 360p

Then I thought it was a bargain at 340p

Then I thought it was a bargain at 320p

Then ..........