Kensington's loan clout

Successive property slumps in the UK have persuaded mortgage lenders to take a cautious view on who they should lend money to. Most rely on credit scoring based on salary data. If in doubt, mortgage applications are chucked out.

But evidence that the Bank of England has learned how to control inflation, and hence house price surges and slumps, has now provided market newcomer Kensington with an opportunity.

Using technology and skilled intermediaries, the company assesses the potential of individuals to service mortgages on a wider basis than just annual remuneration. Its experts are skilled in credit analysis: they will take a view on lending someone money if the interest they pay is priced to take account of credit risk.

The prospective bonuses earned by an investment banker would, for example, count in their favour. The self-employed, older borrowers and people who have previously experienced credit problems would also be Kensington customers. Loans made are then packaged up and resold to other lenders through securitisation.

Crucially, this is not a start-up. Kensington, founded by ex-Goldman Sachs senior trader Martin Finegold, has put together a string of lending packages since 1994. It has carried out 11 loan portfolio securitisations totalling more than £1.75 billion. There are now nearly 18,000 Kensington borrowers.

Profits are growing nicely. In the year to November 1998, Kensington made pre-tax profits of £3.9 million. In 1998-9, it made £9.6 million. In the half year to May this year, profits totalled £7.5 million. The company is forecasting £19 million for the full year, and £27 million is in prospect for 2000-1.

The company outsources administration to Skipton Building Society. It concentrates its efforts on making sure that borrowers are sufficiently wealthy, creditworthy and honest, using a data warehouse which makes full use of the internet to make the information available to both Kensington management and specially trained intermediaries.

Despite Kensington's growth record, its shares are being sold cheaply because 37 per cent shareholder, Ocwen Financial Corporation of the US, needs the cash to achieve its own restructuring. Kensington is raising an additional £34 million to spend on its own business.

Reasonable profit forecasts would suggest that the shares are being sold on an earnings multiple of 7.5, based on 2000-1 forecasts, which compares with average multiples of 13 achieved by quoted consumer finance operations Cattles and London Scottish Bank.

Maltby's presentations have gone down well with institutions, corralled by advisers Schroder Salomon Smith Barney, ABN Amro Rothschild, Bear Sterns and Investec Henderson Crosthwaite. ÊIt is not often that blue chip firms such as these work together on a new issue whose market value looks likely to total just £150 million at inception.

All concerned must believe that the company has something good going for it. One perception is that Kensington will attract a bid from a traditional mortgage lender.

As Growth Company Investor went to press, the price at which Kensington shares were to be sold had not been finalised. But 250p, at the lower end of expectations, was on the cards. A price target of 350p is seen as feasible, and investors should consider buying the stock at levels below this.

Sector: General Financial

Companies: Kensington Group

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