DPC(FY2014) vs TUA Finance Division Comparison (FY2013)
Quote:
Originally Posted by
Snoopy
I agree that on a superficial comparative basis DPC looks expensive. So is there something I have missed that could justify the high price? Take a look at the divisional break down of the FY2014 result, and look at the Finance division.
EBIT was $3,360m. Of course this doesn't take into account any 'corporate costs' (total -$3.879m) . I like to allocate these back into any divisional result on a 'fair allocation basis'. But how to do that?
As a first step I would adjust the corporate costs to remove the 'present value of optional convertible notes interest installments'. The convertible notes no longer exist so this item will not appear as a corporate cost in future years. I would also add back $2.179m in interest expense. My definition of 'Operating Profit' = EBIT. So I think it is very unhelpful of DPC to declare an 'operating profit' with interest expense already taken off. Making those two adjustments to 'Corporate Costs' I get a total corporate cost figure of just -$31,000.
DPC has given us a depreciation and amortization charge for each division. I propose this is a measure of how hard they are working their assets in each division in gross terms. So I would allocate 'Corporate Costs' amongst each division in proportion to depreciation and amoritization expense. I calculate a finance division allocation of corporate costs to be $10,140 on this basis.
So the FY2014 EBIT for the finance division is $3.360m - $0.01014m = $3.350m
We also are told the segment assets for the finance division total $37,953m at years end.
So EBIT /Segment Assets = $3.35m / $37,953m = 8.83%
Now compare this with the equivalent TUA finance division result:
TUAF FY2013 ($1.861m-$1.151m) / ($10.684m + $14.916m) = 2.8%
and you can see that Dorchester makes three times as much 'operating profit' as TUA does for doing essentially the same job on a similar sized loan book. Maybe the boys at DPC really do deserve that sharemarket investment premium?
Despite the seemingly time shifted comparison, I am largely covering the same months of the year, because of the different balance dates of TUA (31st December) and DPC (31st March).
Noodles has pointed out that for TUA I used EBT and for DPC I used EBIT, so the above comparison is not fair. To fix this I will add back the interest paid into the TUA result.
So the FY2014 EBIT for the DPC finance division is $3.360m - $0.01014m = $3.350m
We also are told the segment assets for the finance division total $37,953m at years end.
So EBIT /Segment Assets = $3.35m / $37,953m = 8.83%
Now compare this with the equivalent TUA finance division result:
TUAF FY2013 ($1.861m-$1.151m+$1.926m) / ($10.684m + $14.916m) = 10.3%
and you can see that TUA makes an 'operating profit' which is one and a half basis points above the earnings of DPC for doing essentially the same job on a similar sized loan book. I am happy that the result was closer than I thought, because is such similar competitive markets, it would make sense for the two operating margins to be wildly different.
If DPC really do deserve that sharemarket investment premium, I will now argue it is not because of their prowess with the loan book.
SNOOPY