An Investment Story - Geneva/Turners/Heartland [Archive]

Snoopy

15-08-2016, 11:20 AM

Could you repost the first 3 chapters

Winner has suggested that I put my 'investment story' on a separate thread because it may be of interest to more than TNR (now TRA) shareholders. I would like to open with a preamble.

It is notoriously difficult to compare finance companies, because their operations tend to be different both in size and scope.

Turners Finance is largely a motor vehicle lender. But you cannot buy shares in Turners Finance. You can only by shares in Turners Limited (TNR, now renamed TRA), and that includes the adjunct 'Auctions & Fleet' (now renamed 'Automotive Retail') car and machinery sales buinesses. This means it is necessary to unpick the company of Turners structure in order to get valid comparisons.

Geneva (GFL) does a lot of lending on motor vehicles too, but also wider consumer finance (e.g. Hire Purchase deals). So Geneva is a yardstick for Turners, even if in total asset terms it is only one sixth the size.

Heartland (HBL, now renamed HGH) is perhaps New Zealand's most widely respected finance company, and deals with a much wider category set of receivables customers. However in asset terms, Heartland is nine times the size of TNR/TRA. If looking at the size differential in terms of finance assets only, it is nearer to twenty times the size of TNR/TRA. A major difference of Heartland today is that they take deposits from customers, whereas post GFC, Turners (the old Dorchester) and Geneva no longer do.

For those companies that are listed in NZ and regularly disclose detailed accounts I think the comparison of 'Heartland' vs 'Turners' and 'Turners' vs 'Geneva' is useful. Comparing 'Heartland' with 'Geneva' might be stretching things though! Probably the best thing to do with the numerical tables that follow is to see what makes sense in context, rather than think of them as some definitive guru solution!

SNOOPY

Snoopy

15-08-2016, 11:35 AM

Over the last couple of years I have specialised in creating a lot of 'financial information' surrounding 'Turners'. However, although 'interesting' I have decided it is not that useful. The trouble is, a jumble of numbers on its own is just that, a jumble of numbers. What is needed is a cohesive thread to draw it all together, a 'story' if you like. Tell a story and suddenly the numbers have context and an overall meaning.

So here is the 'story' I intend to tell around TNR.

There are three characters in this story,

1/Geneva Finance (GFL),
2/Turners Limited (TNR, now TRA) and
3/ Heartland Limited (HBL, now HGH),

listed in terms of decreasing perceived risk. The characters are not equal. But they all operate in the New Zealand finance market. All at one stage took deposits from the public, but only HBL/HGH does this now. TNR is 'the one in the middle'.

The first statistic in this story is PE ratio (see Chapter 2). Investors need to know this, because they need to know how much Mr Market is currently prepared to pay for these companies' earnings. A company with more 'future potential' should command a higher PE ratio. Now, what might 'cause' a higher PE ratio?

ROE (return on shareholder equity) (see Chapter 3) is a measure of how efficiently a company can deliver earnings from a given resource of equity. The higher the ROE, the more efficiently the company is using its capital. Net Interest Margin (see Chapter 4a) is another measure of efficiency. But this applies only to financial entities, and that doesn't include the adjunct Turners Limited Auction and Fleet business. Net Profit Margin (see Chapter 4b) is a similar figure that applies to all companies, and takes into account the cost of doing business over and above the difference between borrowing and lending rates. A third measure of efficiency is the underlying gearing of the loan book. (see Chapter 5). Put simply, every finance company has an underlying shell, upon which is superimposed funds borrowed from a 'parent bank' (and/or depositor customers) and 'funds loaned' to borrowing customers as 'financial receivables'. With the underlying shell stripped out, investors can get a feel for how far the 'funds loaned' base is leveraged on the 'funds borrowed' base.

There are a couple of ways to present profits in an overexaggerated way:

1/The first is to underestimate the impaired asset position (see Chapter 6) . I look at the declared impaired asset position in relation to the total loan portfolio, including impaired assets, to get a feel for this. The 'impaired asset position' is a longer term reflective 'snapshot of state' that is modified every year by the Impaired Asset Expense (see Chapter 7) . The change in 'impaired asset expense' year on year is a measure of current year impairment effects.
2/ The second way is to borrow to the hilt against your capital base. My preferred indicator for this is MDRT or 'minimum debt repayment time' (see Chapter 8). This is a number that answers the question: If all profits were poured back in to repaying debt, how many years would it take to pay off that debt?

To summarize:

1/ P/E ratio measures 'market premium value'.

2/ 'ROE', 'Net Interest Margin' and 'Net Profit Margin' and 'Underlying Gearing of Loan Book' are three ways to measure why a higher than average P/E could be justified.

3/ 'Impaired Asset Position' and 'MDRT' are two measures to look at whether the accounts as presented are believable and long term sustainable.

With characters introduced, and the story outline told, it is time for the comparative battle to commence.

SNOOPY

Snoopy

15-08-2016, 11:38 AM

To summarize:

1/ P/E ratio measures value.

Note that:

1/ The financial year (FY) ends on 31st March for Turners and Geneva, and 30th June for Heartland.
2/ Geneva results have been adjusted for the 06-07-2016 7:1 share consolidation.
3/ Turners results have been adjusted for the 22-03-2016 10:1 share consolidation.
4/ Turners results for FY2015 taxed at 28% (the future rate) for better YOY comparison.

Normalised ProfitShares on IssueepsShare PricePE Ratio

Heartland FY2015$48.163m-$0.588m- $0.098m=$47.477m469.890m10.1cps$1.1211.1

Heartland FY2016$54.164m-$1.136m-$0.322m =$52.706m476.469m11.1cps$1.5113.7

Heartland FY2017$60.808m-0.72x$1.2m-$0.628m =$59.316m516.684m11.5cps$1.8015.7

Heartland FY2018$67.513m+0.72x$1.3m-($4.8m+$0.6m)-$0.156m =$62.893m560.587m11.2cps$1.7315.4

Heartland FY2019$73.617m+ 0.72x($1.8m+$1.3m+$1.1m) -$1.936m -$0.173m =$74.532m569.338m13.1cps$1.5912.1

Turners FY2015[$19.006m-($0.010+$7.058)m]x0.72=$8.595m63.077m13.6cps$2.6519.4

Turners FY2016$15.602m-($0.200+$0.070)m=$15.332m63.431m24.2cps$3.0812.7

Turners FY2017$17.574m-($1.229m+$0.084)m=$16.261m74.524m21.8cps$3.2414.9

Turners FY2018$23.360m-($0.590+$0.820+$1.000)m-0.72x$2.664m =$19.085m84.802m22.5cps$2.9513.1

Geneva FY2015$2.194m70.435m3.1cps22c7.1

Geneva FY2016$3.529m70.435m5.0cps41c8.2

Geneva FY2017$5.133m70.435m7.3cps55c7.5

Geneva FY2018$6.123m70.435m8.7cps57c6.6

Geneva FY2019$4.210m72.935m5.8cps52c9.0

Note:

1/ Heartland normalised profit removes gain from sale of investments and property plant and equipment.
1b/ In FY2017 I have removed a $1.2m insurance recovery write back.
1c/ In FY2018 I have added back a summed total of $1.3m in costs, representing from systems integration ($0.5m) and legacy system write offs ($0.3m) plus the costs so far spent on the proposed corporate restructure ($0.5m). I have removed the $0.6m profit on the sale of the bank invoice finance business and the $4.8m recovered from a legacy property loan from MARAC. I have removed $157k which represents a gain on sale of investments. However, I consider the additional provisioning for large relationship loans of $2.2m part of normal business operations and not a one off expense.
1d/ In FY2019 I have removed the $1.936m fair value movement of investment property gain, and the $173k gain on sale of investments.
2/ Turners normalised result removes revaluation gain on investments and gain on sale of PP&E, and the revaluation gain on the former TUA holding that was caused by the parent company's own bid to delist TUA (ref FY2015).
2b/ In FY2018 I have excluded the Turners "Fair value gain on contingent consideration" insurance contracts adjustments.
3/ Geneva becomes a net tax payer for the first time in FY2019.

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance (FY2015 perspective). Can such a premium be justified?

SNOOPY

Snoopy

15-08-2016, 11:41 AM

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

Normalised Profit (A)Shareholder Funds SOFYShareholder Funds EOFYShareholder Funds (average) (B)ROE (A/B)

Heartland FY2015$47.477m$452.622m$480.125m$466.374m10.2%

Heartland FY2016$52.706m$480.125m$498.341m$489.233m10.8%

Heartland FY2017$59.316m$498.341m$569.595m$533.968m11.1%

Heartland FY2018$62.893m$569.595m$664.160m$616.878m10.2%

Heartland FY2019$74.532m$664.160m$675.668m$669.914m11.1%

Turners Limited FY2015$8.595m$74.052m$121.002m$97.527m8.8%

Turners Limited FY2016$15.332m$121.002m$129.812m$125.007m12.2%

Turners Automotive Group FY2017$16.261m$129.812m$171.716m$150.764m10.8%

Turners Automotive Group FY2018$19.085m$171.716m$214.323m$193.012m9.9%

Turners Automotive Group FY2019$xx.xxxm$214.323m$226.374m$220.349mx.x%

Turners Finance FY2015$4.604m$38.44m$57.82m$48.13m9.6%

Turners Finance FY2016$8.691m$57.82m$63.87m$60.85m14.3%

Turners Finance FY2017$9.019m$63.869m$54.431m$59.150m15.2%

Turners Finance FY2018$10.564m$54.431m$74.018m$62.224m16.5%

Turners Finance FY2019$9.097m$74.018m$72.205m$73.112m12.4%

Geneva FY2015$2.194m$8.386m$16.054m$12.220m18.0%

Geneva FY2016$3.529m$16.054m$20.256m$18.155m19.4%

Geneva FY2017$5.133m$20.256m$24.862m$22.559m22.8%

Geneva FY2018$6.123m$24.862m$29.168m$27.015m22.7%

Geneva FY2019$4.210m$29.168m$29.396m$29.282m14.4%

SNOOPY

Note: Turners Finance results have been adjusted by reallocating 'interest revenue' and implied 'interest revenue profits' (see my post 1551 on the TRA thread) from the 'automotive retail' segment to the 'finance segment'. These finance figures do not include any contribution from the insurance or EC Credt business segments.

Beagle

15-08-2016, 11:47 AM

Snoopy

15-08-2016, 12:09 PM

One of there companies does not go with the others. Refer my posts in the Geneva thread. If you must compare them then based on their truly appalling track record of shareholder wealth destruction I think Geneva should trade on a PE of less than half the other two companies, (assuming you think Geneva have provided for bad and doubtful debts correctly and that they really are making a profit at all).

Roger, these tables are based on current results and are what happens when I turn my calculator crank handle. Of course historical factors are not considered. This is not to say they shouldn't be as part of a wider picture. One table on its own does not give that wider picture. Bad and doubtful debts are another table entirely, and these will be considered in due course. I know that you, and many others, have documented your own far from positive experiences with Geneva. From a shareholders of todays perspective these experiences are gone, albeit not forgotten, and nor should they be forgotten. But that is not the point of the ROE table I am presenting. It is one block in an emerging picture, it doesn't contain historical baggage and nor should it. Please take everything in the context in which it is presented, without reading more or less into the picture than you should!

SNOOPY

Snoopy

15-08-2016, 12:13 PM

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

Interest Received (A)Interest Expenses (B)Cash Earning Assets SOFYCash Earning Assets EOFYCash Earning Assets (average) (C)Net Interest Margin ( (A-B)/C )

Heartland Reporting Bank FY2015$220.607m$98.705m$2,947.578m$3,291.062m$3,11 9.320m3.91%

Heartland Bank FY2016$265.475m$118.815m$3,291.062m$3,413.423m$3,3 52.234m4.37%

Heartland Bank FY2017$278.279m$115.169m$3,413..423m$3,933.685m$3, 673.554m4.43%

Heartland Bank FY2018$309.284m$125.483m$3,933.685m$4,397.350m$4,1 60.518m4.41%

Heartland Group Holdings FY2019$334.330m$136.747m$4,397.350m$4,774.769m$4,5 86.060m4.31%

Turners Finance FY2015$24.278m0.4895x $7.381m$37.726m+$49.953m$142.827m$129.040m16.0%

Turners Finance FY2016$31.793m0.5123x $11.436m$142.827m$167.598m$155.213m16.7%

Turners Finance FY2017$34.471m0.4122x $11.350m$167.598m$207.143m$187.371m15.9%

Turners Finance FY2018$49.377m0.5104x $14.344m$207.143m$289.799m$248.471m16.9%

Turners Finance FY2019$52.579m0.5650x $14.952m$289.799m$290.017m$289.908m15.2%

Geneva FY2015$6.504m$3.075m$34.895m$45.927m$40.411m8.50%

Geneva FY2016$9.213m$3.372m$45.927m$62.601m$54.264m10.6%

Geneva FY2017$11.357m$3.456m$65.632m$78.339m$71.986m11.0%

Geneva FY2018$12.242m$3.584m$78.339m$85.527m$81.933m10.6%

Geneva FY2019$14.865m$4.232m$85.527m$102.812m$94.170m11.3 %

Notes:

1a/ 'Cash Earning Assets' for Heartland were calculated as follows:

Finance Receivables + Investments + Investment Properties + Non software Goodwill + Operating Lease Vehicles = Cash Earning Assets

2a/ 'Interest Received' from the Turners 'Finance segment' includes the interest received from the 'Automotive Retail' segment plus an apportionment of 'Corporate and Other' segment interest received. It does not include earnings from the 'insurance' and 'EC Credit' segments.

I note that the 'net interest margin' is extremely healthy for Turners Finance (FY2016 perspective), even compared to the 'more risky' Geneva Finance. The Heartland NIM is healthy in bank terms. But it compares poorly to the two comparative finance companies.

SNOOPY

Snoopy

15-08-2016, 02:53 PM

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

Liabilities (Shell) (A)Assets (Shell) (B)(A/B)Liabilities (Finance) (C)Assets (Finance) (D)(C/D)Total Liabilities (E)Total Assets (F)Overall Gearing (E/F)

Heartland Reporting Bank FY2015$78.790m$166.711m47.3%$2,346.977m$2,636.277m 89.0%$2,425.767m$2,802.988m86.5%

Heartland Bank FY2016$48.853m$133.758m36.5%$2,999.987m$3,415.423m 87.8%$3,048.840m$3,547.181m86.0%

Heartland Bank FY2017$33.335m$100.986m33.0%$3,429.741m$3,933.685m 87.2%$3,465.076m$4,034.671m85.9%

Heartland Bank FY2018$35.708m$98.576m36,2%$3,796.058m$4,397.350m8 6.3%$3,831.766m$4,495.926m85.2%

Heartland Group Holdings FY2019$40.402m$151.635m26.6%$4,210.334m$4,774.769m 88.2%$4.250.736m$4,926.404m86.3%

Turners Finance FY2015$15.121m$16.801m90%$86.682m$142.827m60.7%

Turners Finance FY2016$13.839m$15.377m90%$105.268m$167.598m62.8%

Turners Finance FY2017$5.342m$5.935m90%$153.305m$207.143m74.0%

Turners Finance FY2018$6.739m$7.488m90%$216.531m$289.799m74.7%

Turners Finance FY2019$21.523m$23.914m90%$220.203m$290.017m75.9%

Turners Limited FY2015$207.970m$328.978m63.2%

Turners Limited FY2016$232.491m$362.303m64.2%

Turners Automotive Group FY2017$384.917m$556.633m69.2%

Turners Automotive Group FY2018$437.409m$651.732m67.1%

Turners Automotive Group FY2019$427.808m$654.182m65.4%

Geneva FY2015$8.065m$8.959m90%$26.665m$41.833m63.7%$34.72 8m$50.792m68.4%

Geneva FY2016$13.547m$15.052m90%$35.825m$54.576m65.6%$49. 372m$69.628m70.9%

Geneva FY2017$18.090m$20.100m90%$41.225m$64.077m64.3%$59. 315m$84.177m70.5%

Geneva FY2018$28.491m$31.657m90%$41.662m$67.664m61.6%$70. 153m$99.321m70.6%

Geneva FY2019$32.648m$36.275m90%$55.172m$80.491m68.5%$87. 820m$117.216m74.9%

As a much larger operation and a more diverse lender, Heartland's banking operation is -potentially- much more highly geared than the two smaller finance companies. The leverage of the loan book in Geneva and Turners may be understated because I have assumed that the underlying shell company that supports the loans is maximally stretched.

------

Looking at Turners vs Geneva (FY2016 perspective), there might to room to boost the Turners Lending gearing ratio by three to four percentage points. In practical terms, this means doing more lending without increasing the underlying bank loan that funds the business.

$362.303m x 0.68 = $246.366m
$246.366m -$232.491m = $13.875m

Assuming all of that extra revenue flows straight through to the bottom line, this translates to a latent hidden after tax profit boost of $13%[/.875m x 0.72 = $10.0m

------

So there is a broad hint as to why the PE ratio (FY2015 perspective) that Mr Market is prepared to pay for TNR is higher! Fast forward to an FY2017 perspective, and we can see that Turners is now working its balance sheet harder!

SNOOPY

Snoopy

06-05-2017, 03:36 PM

Provision for Impairment (A)'Net Receivables' + 'Provision for Impairment' (B)(A/B)

Heartland Bank FY2015$25.412m$2,887.482m0.88%

Heartland Bank FY2016$21.161m$3,135.118m0.68%

Heartland Bank FY2017$25.865m$3,571.762m0.72%

Heartland Bank FY2018$29.671m$4,014.612m0.74%

Heartland Group Holdings FY2019$58.491m$4,406.541m1.33%

Turners Finance (Division) FY2015$6.986m$149.813m4.7%

Turners Finance (Division) FY2016$6.776m$174.374m3.9%

Turners Finance (Division) FY2017$6.028m$213,171m2.8%

Turners Finance (Division) FY2018$11.294m$301.093m3.8%

Turners Finance (Division) FY2019$19.595m$300.612m6.5%

Geneva FY2015$29.631m$71.464m41%

Geneva FY2016$29.448m$84.024m35%

Geneva FY2017$29.889m$93.966m32%

Geneva FY2018$25.643m$93.307m27%

Geneva FY2019$17.793m$98.734m18%

Notes:

1a/ For Heartland refer to note 19e in the Annual Report on Asset Quality. (AR2016)
1b/ IFRS9 adopted in FY2019 has resulted in a change to the way the 'provision for impairment' is measured. This is due to the adoption of the 'Expected Credit Loss' (ECL) model. For FY2018, this has resulted in an increase from the former $29.671m to $57.756m (details AR2109 p26). There is currently no fair value adjustment to the transaction price of the reverse mortgage portfolio. (AR2019 p32).
2/ For Turners refer to note 14 on Finance Receivables. (AR2016)
3a/ For Geneva refer to note 17 on Provision for Credit impairment (AR2016)
3b/ Over FY2018 (in September 2017) the collective provision at Geneva was reduced by $4.708m due to the sale of impaired debt to 'Jade Financial Services' (unrelated to the Geneva group).
3c/ Over FY2019 (in April 2018) the collective provision at Geneva was reduced by $12.646m due to the sale of impaired debt to 'Desktop Management Limited' (unrelated to the Geneva group). The adoption of NZ IFRS 9, which includes a predictive model of assessing risk, has seen the impaired loan provision rise by $1.687m.

Note that NZIFRS 9, which was applied for the first time in FY2019, had the effect of significantly increasing the provision for impairment in FY2019 and subsequent years.

This is one way to inspect the quality of the 'financial receivables' asset book.

It is very evident that the 'expected' quality of loans of our three protagonists are very different from this table!

SNOOPY

Snoopy

06-05-2017, 04:18 PM

Impaired Asset Expense (A)EBT + 'Impaired Asset Expense' (B)(A/B)

Heartland Bank FY2015$12,105m$76.304m+16%

Heartland Bank FY2016$13.501m$87.689m+15%

Heartland Bank FY2017$15.015m$99.568m+15%

Heartland Bank FY2018$22.067m$116.361m+19%

Heartland Group Holdings FY2019$20.676m$120.253m+17%

Turners Finance (Division) FY2015$0.020+$0.207m= $0.227m$6.394m(*)+$0.227m=$6.621m+3.4%

Turners Finance (Division) FY2016-$0.544m+$0.526m = -$0.018m$12.071m(*)-$0.018m=$12.053m-0.15%

Turners Finance (Division) FY2017+$0.282m+$0.285m = +$0.567m$12.527m(*)+$0.567m=$13.094m+4.3%

Turners Finance (Division) FY2018+$0.619m+$5.300m = +$5.919m$14.672m(*)+$5.919m=$20.591m+28.8%

Turners Finance (Division) FY2019+$0.914m+$6.890m = +$7.804m$12.635m(*)+$7.804m=$20.439m+38.2%

Geneva FY2015-$0.855m$0.693m-123%

Geneva FY2016-$0.234m$2.145m-10.9%

Geneva FY2017$0.351m$4.166m+8.4%

Geneva FY2018$0.363m$4.887m+7.4%

Geneva FY2019$1.697m$6.947m+24.4%

The aim of this exercise is to compare the quantum of 'impairment expense' with a measure of earnings (in this case EBT) before that 'impairment expense' was deducted.

(*) These Turners Finance Division EBT figures are not to be found in the annual report. I have used my own spreadsheet modelling to create these. As part of this process I have allocated head office costs between the various Turners Limited divisions. (added 01-09-2017: I have now further revised Turners Finance Earnings to include finance earnings diverted to the Automotive Retail segment as derived from Automotive Retail 'interest income')

Note that the 'Impaired Asset Expense' figures for Geneva for FY2015 and FY2016 were negative (as was Turners for FY2016) because there was an impaired asset release from all the previous provisioning in both years FY2015 and FY2016.

The impaired asset expense treatment looks very different between Heartland and Turners. In the case of Heartland, there is an annual impairment provision. This provision is then taken into the impaired asset account. Within the impaired asset account there is an annual 'write off' of bad loans. This means the annual write offs are not reflected directly in the annual accounts. The provisioning system is used by Heartland to massage extreme movements in the impaired asset account over several years. Contrast this approach with Turners Limited.

In the case of Turners, the full change in value of the impairment account is reflected in the annual result each year. Noteworthy is the observation that the actual impaired asset expense each year (Note 7, AR2016) is very low as a percentage of the overall loan book.

Geneva seems to follow the Turners example of bringing the total change in the value of the impairment provision account (Note 12, AR2016) into the profit and loss statement each year.

SNOOPY

Beagle

06-05-2017, 04:32 PM

Provision for Impairment (A)'Net Receivables' + 'Provision for Impairment' (B)(A/B)

Heartland Bank FY2015$25.412m$2,887.482m0.88%

Heartland Bank FY2016$21.161m$3,135.118m0.68%

Turners Finance (Division) FY2015$6.986m$149.813m4.7%

Turners Finance (Division) FY2016$6.776m$174.374m3.9%

Geneva FY2015$29.631m$71.464m41%

Geneva FY2016$29.448m$84.024m35%

This is one way to inspect the quality of the 'financial receivables' asset book.

It is very evident that the 'expected' quality of loans of our three protagonists are very different from this table!

SNOOPY

The long run provisioning estimates by Geneva finance have been notoriously inaccurate. That company has destroyed vast sums of shareholder wealth since its inception well over a decade ago and I remain unconvinced their business model has any merit whatsoever. I am also of the view that the auditing methodologies used by the auditors cannot be relied upon to determine the veracity of the provisioning assumptions underpinning Geneva's stated profit. Vast numbers of their customers would simply enter a no asset procedure to extinguish their debt if hard economic times hit again.
Please refer to post #7 above.

Major von Tempsky

06-05-2017, 06:47 PM

Glad to see Geneva basically coming top! Now it can be updated for another year for Geneva with Geneva's latest results.

Beagle

07-05-2017, 09:50 AM

Snoopy

07-05-2017, 10:49 AM

Provision for Impairment (A)'Net Receivables' + 'Provision for Impairment' (B)(A/B)

Geneva FY2015$29.631m$71.464m41%

Geneva FY2016$29.448m$84.024m35%

The long run provisioning estimates by Geneva finance have been notoriously inaccurate.

It is very unusual for a company, in this case Geneva, to have such a large amount of provisioning in relation to their loan book size.

I am also of the view that the auditing methodologies used by the auditors cannot be relied upon to determine the veracity of the provisioning assumptions underpinning Geneva's stated profit. Vast numbers of their customers would simply enter a no asset procedure to extinguish their debt if hard economic times hit again.

I wonder if this is the explanation? Management know they are in a high risk area of the loan market. They know many of their loans will be unrecoverable in an economic downturn. So they are being extremely prudent in their approach to the loan book. Evidence of extremely good planning and foresight?

Mind you this same prudence could be used to manipulate profit. All Geneva need to do is to reclassify some of their 'provisions' as 'good loans', and this number immediately flows through to the bottom line. Geneva posted that the unaudited profit for FY2016 is up 61% on FY2015. But there is not enough detail on where this profit increase has come from to judge the result in my opinion.

"The profit growth was primarily attributable to the growth in interest income from the receivables ledger (which increased +17% on last year), the maintenance of interest yields, control of asset quality and the growth in revenues of our insurance operations where net premium income was 60% up on March 2016.”

'Control of Asset Quality' could simply mean writing back the value of previously impaired assets, that flows straight to the bottom line. Doing that might grossly distort the assumed operational performance if you just read the headline profit figure. But until the detail comes out, no-one knows what the real operational improvement performance for Geneva has been.

SNOOPY

percy

07-05-2017, 10:54 AM

Bit like buying oats.
Oats that has been through the horse, comes a little cheaper.

Beagle

07-05-2017, 02:12 PM

Snoopy...what Percy said sums it up perfectly. Talk more about it after the weekend if you want too but the guts of it is Geneva have played loose with their provisioning ever since their inception and have destroyed many millions of dollars of deposit holders, shareholders and unsecured capital note holders wealth.

I am not at all convinced their business model has any merit whatsoever.

Major von Tempsky

08-05-2017, 10:40 AM

Geneva's results are prepared by chartered accountants and audited by chartered accountants and accepted by the NZX. If you think there is fraud involved you should complain to the Serious Fraud Office.

But you (Roger) won't, because you know your complaint won't be accepted or validated. And because you are much happier just continuing to whinge.

My portfolio on Direct Broking shows that I have made a 79.4% profit, unrealised, of $62,155.07 on Geneva Finance Ltd.

Beagle

08-05-2017, 12:11 PM

FYI I did indeed complain to the Securities Commission who were the regulator at the time. Geneva were the subject of a long running investigation by them and I liaised with the lead investigator at some length. The lead investigator was extremely disappointed that SC didn't prosecute and resigned in protest. The reality at the time as he explained it to me was that SC had extremely limited funds to prosecute cases and dozens of finance companies to investigate so only the most overt criminal cases were pursued.

I stand by my comments in the Geneva thread and will only add this, the only reason I didn't personally sue the directors of Geneva finance is we arrived at settlement with them and the only reason I didn't sue the auditors for our remaining family losses is that the cost to bring an action in the high court would have run to several hundred thousand dollars, more than our losses after above mentioned settlement.

I prefer not to say any more other than these three things. I hope you are happy making profits off the back of investors who collectively lost many millions in this company. My free caution to you is if you build your house on sand then when the storm comes...
Provisioning involves the exercise of due professional care and proper prudent judgement in assessing the likely level of future loan delinquencies.
To invest in Geneva you have to believe that the current management and directors have proven themselves in their ability to make those extensive judgement calls appropriately. Their long term track record suggests the veracity of their delinquency modelling is fundamentally flawed.

Snoopy

08-05-2017, 05:39 PM

What would happen if all profits were directed to paying off a company's debt? How long would that take? The answer to this question, in years, is the 'Minimum Debt Repayment Time' (MDRT).

Throughout this thread (so far) I have taken the view that 'operational performance' is the most important thing. However when it comes to paying back debt what matters most is the 'declared profit'. This is because all 'cash in', including that form one off assets sales (for example) is equally good when it comes to applying that cash to repay debt.

Sometimes 'declared after tax profit' contains non cashflow items. One such item is the provisioning for impaired assets. A company would not impair assets if it did not believe that some impairment was necessary. Nevertheless, in the short term, this extra cashflow could be used to repay debt at a pinch. So I have added back in the impaired asset provision to after tax profit. This 'adjusted profit' is an estimate of the finance company's ability to repay debt in the current year if all resources were called upon.

When evaluating a finance company's debt, I am considering the 'net debt' position. That means I take the company's debt obligations and subtract that from the cash on hand.

Minimum Debt Repayment Time (MDRT) {years}

Heartland Bank FY201512.1

Heartland Bank FY20169.9

Heartland Bank FY201711.2

Heartland Bank FY201810.4

Heartland Group Holdings FY201911.0

Turners Limited FY20157.4

Turners Limited FY20169.8

Turners Automotive Group FY201710.3

Turners Automotive Group FY201810.5

Turners Automotive Group FY20199.5

Geneva FY201517.7

Geneva FY201611.1

Geneva FY20178.0

Geneva FY20187.1

Geneva FY201910.1

The three companies showed a wide divergence in this statistic in FY2015. Yet, come FY2016, they have all converged towards the 10 to 11 figure. From a MDRT risk perspective this means there is little to choose between these three protagonists.

SNOOPY

P.S. Sample calculations for FY2016 (and others) are below:

MDRT Heartland FY2016

[(Subordinated Bond) + (Parent Bank Borrowings) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($3.378m+ $429.034m + $284.429m) - $84.154m] / [ $54.164n + 0.72($13.501m) ] = 9.9 years

MDRT Heartland FY2017

[(Subordinated Bond) + (Subordinated Notes) + (Parent Bank Borrowings) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($3.378m+ $21.180m + $616.838m + $214.365m) - $57.040m] / [ $60.808m + 0.72($15.015m) ] = 11.2 years

MDRT Heartland FY2018

[(Subordinated Bond) + (Subordinated Notes) + (Unsubordinated Notes) + (Parent Bank Borrowings) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($3.378m+ $22.172m + $151.853 + $689.346m + $47.504m) - $49.588m] / [ $67.513m + 0.72($22.067m) ] = 10.4 years

MDRT Heartland FY2019

[(Unsubordinated Notes) + (Parent Bank Borrowings) + (Certificate of Deposit) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($337.680m + $25.002m + $34.836m + $659.135m) - $80.584m] / [ $73.617m + 0.72($20.676m) ] = 11.0 years

MDRT Turners Limited FY2016

[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($109.327m+ $42.300m + $23.189m) - $13.810m] / [ $15.602n + 0.72($1.041m) ] = 9.8 years

MDRT Turners Automotive Group FY2017

[(Parent Bank Borrowings) + (MTA Borrowings) + (TRAHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $17.574m + 0.72x $2.206m] = 10.3 years

MDRT Turners Automotive Group FY2018

[(Parent Bank Borrowings) + (MTA Borrowings) + (Vendor Property Funding)+ (TRAHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($230.712m+ $58.603m + $2.837m + $25.474m) - $25.145m] / [ $23.360m + 0.72 x $6.380m ] = 10.5 years

MDRT Turners Automotive Group FY2019

[(Parent Bank Borrowings) + (MTA Borrowings) + (TRA100 bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($251.177m+ $37.055m + $24.631m) - $15.866m] / [ $22.719m + 0.72 x($7.892m +$4.200)] = 9.5 years

MDRT Geneva Finance Limited FY2016

[((Parent Bank Borrowings) + (Unsecured Borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($40.408m+ $4.850m) - $8.025m] / [ $3.529m - 0.72($0.234m) ] = 11.1 years

MDRT Geneva Finance Limited FY2018

[((Parent Bank Borrowings) + (Unsecured Borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($51.971m+ $7.950m) - $14.473m] / [ $6.123m + 0.72($0.363m) ] = 7.1 years

MDRT Geneva Finance Limited FY2019

[((Parent Bank Borrowings) + (Unsecured Borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($59.691m+ $13.318m) - $18.253m] / [ $4.210m + 0.72($1.697m) ] = 10.1 years

Snoopy

11-05-2017, 10:41 PM

Interest Received (A)Interest Expenses (B)Cash Earning Assets SOFYCash Earning Assets EOFYCash Earning Assets (average) (C)Net Interest Margin ( (A-B)/C )

Heartland Reporting Bank FY2015$220.607m$98.705m$2,947.578m$3,291.062m$3,11 9.320m3.91%

Heartland Bank FY2016$265.475m$118.815m$3,291.062m$3,413.423m$3,3 52.234m4.37%

Heartland Bank FY2017$278.279m$115.169m$3,413..423m$3,933.685m$3, 673.554m4.43%

Heartland Bank FY2018$309.284m$125.483m$3,933.685m$4,397.350m$4,1 60.518m4.41%

Heartland Group Holdings FY2019$334.330m$136.747m$4,397.350m$4,774.769m$4,5 86.060m4.31%

Turners Finance FY2015$24.278m0.4895x $7.381m$37.726m+$49.953m$142.827m$129.040m16.0%

Turners Finance FY2016$31.793m0.5123x $11.436m$142.827m$167.598m$155.213m16.7%

Turners Finance FY2017$34.471m0.4122x $11.350m$167.598m$207.143m$187.371m15.9%

Turners Finance FY2018$49.377m0.5104x $14.344m$207.143m$289.799m$248.471m16.9%

Turners Finance FY2019$52.579m0.5650x $14.952m$289.799m$290.017m$289.908m15.2%

Geneva FY2015$6.504m$3.075m$34.895m$45.927m$40.411m8.50%

Geneva FY2016$9.213m$3.372m$45.927m$62.601m$54.264m10.6%

Geneva FY2017$11.357m$3.456m$65.632m$78.339m$71.986m11.0%

Geneva FY2018$12.242m$3.584m$78.339m$85.527m$81.933m10.6%

Geneva FY2019$14.865m$4.232m$85.527m$102.812m$94.170m11.3 %

Notes:

1a/ 'Cash Earning Assets' for Heartland were calculated as follows:

Finance Receivables + Investments + Investment Properties + Non software Goodwill + Operating Lease Vehicles = Cash Earning Assets

2a/ 'Interest Received' from the Turners 'Finance segment' includes the interest received from the 'Automotive Retail' segment plus an apportionment of 'Corporate and Other' segment interest received. It does not include earnings from the 'insurance' and 'EC Credit' segments.

I note that the 'net interest margin' is extremely healthy for Turners Finance (FY2016 perspective), even compared to the 'more risky' Geneva Finance. The Heartland NIM is healthy in bank terms. But it compares poorly to the two comparative finance companies.

It is interesting to compare the above post comparing 'net interest margins' with the 'net profit margin' below.

Normalised Profit (A)Gross Revenue (B)Net Profit Margin (A/B)

Heartland Bank FY2015$47.477m$260.458m18.2%

Heartland Bank FY2016$52.706m$265.475m19.8%

Heartland Bank FY2017$59.316m$278.279m21.3%

Heartland Bank FY2018$62.893m$309.284m20.3%

Heartland Group Holdings FY2019$74.532m$334.330m22.3%

Turners Limited FY2015$8.595m$90.195m9.5%

Turners Limited FY2016$15.332m$171.195m9.0%

Turners Automotive Group FY2017$16.261m$249.338m6.5%

Turners Automotive Group FY2018$19.085m$325.047m5.9%

Turners Automotive Group FY2019$xx.xxxm$328.258mx.x%

Turners Finance Division FY2015$6.394m x 0.72$19.512m+$2.781m+$1.985m= $24.278m19.0%

Turners Finance Division FY2016$12.071m x 0.72$24.415m+$7.261m+$0.017m= $31.793m27.3%

Turners Finance Division FY2017$12.527m x 0.72$26.818m+$7.590m+$0.063m= $34.471m26.2%

Turners Finance Division FY2018$14.672m x 0.72$39.747m+$9.311m+$0.279m= $49.336m21.4%

Turners Finance Division FY2019$12.635m x 0.72$44.193m+$8.383m+$0.003m= $52.579m17.3%

Geneva FY2015$2.194m$6.504m+$1.457m+$1.956m= $9.917m22.1%

Geneva FY2016$3.529m$9.213m+$1.342m+$1.675m= $12.330m28.9%

Geneva FY2017$5.133m$11.357m+$2.469m+$1.593m= $15.419m33.3%

Geneva FY2018$6.123m$12.242m+$4.126m+$2.624m= $18.992m32.3%

Geneva FY2019$4.210m$14.865m+$7.383m+$5.696m= $27.944m15.1%

Note the distinction that I have drawn between 'Turners Limited' (the listed vehicle that shareholders can invest in, in FY2017 renamed 'Turners Automotive Group') and 'Turners Finance' (the finance division of 'Turners Limited'/'Turners Automotive Group'). (added: 01-09-2017: Profits of 'Turner Finance' segment amended to include the referred finance business of the 'Turners Automotive' segment.)

(*) The gross revenue for "Turners Finance' is comprised of the declared revenue for 'Finance' plus the 'Interest Revenue' for 'Automotive Retail' plus an adjustment representing an appropriate proportion of 'Corporate and Other' interest revenue.

SNOOPY

Snoopy

15-05-2017, 06:46 PM

So here is the 'story' I intend to tell around TNR.

There are three characters in this story,

1/Geneva Finance (GFL),
2/Turners Limited (TNR) and
3/ Heartland Limited (HBL),

listed in terms of decreasing perceived risk. The characters are not equal. But they all operate in the New Zealand finance market. All at one stage took deposits from the public, but only HBL does this now. TNR is 'the one in the middle'.

The first statistic in this story is PE ratio. Investors need to know this, because they need to know how much Mr Market is currently prepared to pay for these companies' earnings. A company with more 'future potential' should command a higher PE ratio.

Back on 15th August 2016, the respective historical PE ratios were 13.5 (Heartland), 12.8 (Turners) and 9.6 (Geneva).

a/ Heartland are forecasting a $57m-$60m NPAT for FY2017, +8-15% on the FY2016 result. Heartland currently have 516.2m shares on issue, up from 476.4m at EOFY2016. This 8.4% increase in shares was largely from a capital raising that was not well signalled. In fact some shareholders were expecting a capital return. I don't think any significant new share issue was factored into shareholders expectations back in 15th August 2016.
b/ Turners are forecasting NPAT of $17.3m-$17.6m, +13-15% on the FY2016 result. Note that the number of shares on issue have gone from 63.5m at reporting date to 74.5m today, an increase of 17%. The new shares being issued, largely from conversion of TNRHA bonds, was a well signalled event. So you could argue that those investors in FY2016 'looking forwards' expected a lower 'eps growth' than 'headline profit growth'. 'eps growth' based on projected profit growth for FY2017 taking into account the new shares on issue was -8% to +6%.
c/ Geneva are claiming a $5.1m NPAT, +45% on the FY2016 result. There was a small placement of shares made during the year. But $0.380m on total share capital of $20.256m (2% 0f the total) I would judge as not significant for forecasting 'eps' error purposes.

If we look back on those August 2016 PEs now, we can see that the company with the highest PE ratio at the time (Heartland) achieved a lower growth rate for FY2017 than the company with the lowest PE (Geneva). However, Heartland is the only one of the three with a real track record, and the loans tended to be higher quality. So I guess the market is prepared to pay more for getting behind loans with a lower risk of default.

Geneva looks to have been the stand out performer in terms of prior expectations. A PE of 9.6 in no way reflects the 45% gain in profit in the ensuing year that was achieved.

Turners had the worst 'eps' growth. And I think it is fair to say that Turners had the most 'unsignalled' developments since August 2016

1/ Launches new convertible bond offer.
2/ Signed exclusive loan partnership with MTF
3/ Acquired 'Autosure' insurance business.
4/ Launched 'Cartopia' web only sales channel.
5/ Established securitisation program for loans.

In a 'group of three' it looks like Turners are moving the slowest. But the Turners growth strategy, in general, was well articulated. So the fact that shareholders were prepared to pay a high price in PE terms for this mid-cap share (PE of 12.8) back in August was maybe not a surprise. The historical PE for Turners with reference to 2016 results, in 'eps' terms, is now 17. Turners will have to perform very well from here to justify this high PE rating.

SNOOPY

JoeGrogan

15-05-2017, 07:57 PM

Back on 15th August 2016, the respective historical PE ratios were 13.5 (Heartland), 12.8 (Turners) and 9.6 (Geneva).

a/ Heartland are forecasting a $57m-$60m NPAT for FY2017, +8-15% on the FY2016 result. Heartland currently have 516.2m shares on issue up from 476.4m. This 8.4% increase in shares was largely from a capital raising that was not well signalled. In fact some shareholders were expecting a capital return. I don't think any significant new share issue was factored into shareholders expectations back in 15th August 2016.
b/ Turners are forecasting $24m-$24.5m, +60% on the FY2016 result. Note that the number of shares on issue have gone from 63.5m at reporting date to 74.5m today, an increase of 17%. The new shares issued, largely from conversion of TNRHA bonds, was a well signalled event. So you could argue that those investors in FY2016 'looking forwards' expected a lower 'eps growth' than 'headline profit growth'. 'eps growth' was +51% (still a good result)
c/ Geneva are claiming a $5.1m NPAT, +45% on the FY2016 result. There was a small placement of shares made during the year. But $0.380m on total share capital of $20.256m (2% 0f the total) I woudl judge as not significant for forecasting 'eps' error purposes.

If we look back on those August 2016 PEs now, we can that the company with the highest PE ratio at the time (Heartland) achieved the lowest growth for FY2017. However, Heartland was the only one of the three with a real track record, and the loans tended to be higher quality. So I guess the market is prepared to pay more for getting behind loans with a lower risk of default.

SNOOPY

The Turners forecast of $24-24.5m is profit before tax not NPAT. Last year NPBT was $21.5m, so NPAT this year is likely to be around $18-$21 million.

Beagle

15-05-2017, 07:59 PM

Management know they are in a high risk area of the loan market. They know many of their loans will be unrecoverable in an economic downturn. So they are being extremely prudent in their approach to the loan book. Evidence of extremely good planning and foresight?

You are far wider of the mark than you have been on the HBL thread.
Have look at their long term track record. Let me correct your post. Management know they are in the extreme risk area of the loan market often unsecured lending to people who can't get finance from a mainstream lender at a fairer rate. Management know that a substantial number of their loans would be irrecoverable in another economic downturn and if it weren't for the fact that they now obtain their funding from a proper bank they would have to enter another moratorium. Management also know their credibility with the investing public in terms of debenture securities is shot for all time because they have destroyed so many millions of deposit holders money. Management have no idea whatsoever how to model delinquencies in an economic downturn, in fact they only make a profit in good economic times by under provisioning for bad and doubtful debts across the economic cycle. There is nothing prudent about how this company has been run. Their long term performance has been absolutely appalling. A new generation of gullible investors is currently being taken for a ride. The business model simply does not work across the business cycle.
Every Tom Dick and Harry simply walks away from their debt obligation when the custard hits the fan. You really are wasting your time comparing an apple to an orange and a rotten tomato.

Snoopy

16-05-2017, 10:16 AM

The Turners forecast of $24-24.5m is profit before tax not NPAT. Last year NPBT was $21.5m, so NPAT this year is likely to be around $18-$21 million.

Thanks for picking up the error Joe. I assume a forward tax rate of 28%. So based on Turners NPBT forecast, I would rate the NPAT forecast for Turners over FY2017 to be:

(1-0.28) x ($24m to $24.5m) = $17.3m to $17.5m

I have corrected my post accordingly.

SNOOPY

Snoopy

16-05-2017, 10:20 AM

You are far wider of the mark than you have been on the HBL thread.
Have look at their long term track record. Let me correct your post. Management know they are in the extreme risk area of the loan market often unsecured lending to people who can't get finance from a mainstream lender at a fairer rate.

Roger, can you not make the same argument all the way down the line?

A farmer would be best to finance their new truck by borrowing from the ANZ against their land. But if they are financially stretched, then Heartland would loan them the money at a higher rate. If Heartland say no, then Turners could step up to the plate. And if Turners say no, there is always Geneva.

If you say Geneva is immoral with their lending policy, then how do you rate Turners? There are people out there who have had their cars financed by Turners repossessed. And what about those farmers being charged a much higher loan rate by Heartland than farmer Joe down the road who has got a lower priced loan from ANZ? Are the managers at Heartland immoral too? Or are all lenders 'moral' until the truck gets repsssessed and sold? And at that point, all lenders become scum?

Management also know their credibility with the investing public in terms of debenture securities is shot for all time because they have destroyed so many millions of deposit holders money.

All this is in the open. No more debenture funding from the public is being sought. Of course I have sympathy for those past debenture holders who thought they were putting money in a 'solid as' company that subsequently defaulted. But this is now an historical event, and the fall out is in the public arena as a warning to potential future investors. At some point, those historic debenture holders have to move on.

Management know that a substantial number of their loans would be irrecoverable in another economic downturn and if it weren't for the fact that they now obtain their funding from a proper bank they would have to enter another moratorium. Management also know their credibility with the investing public in terms of debenture securities is shot for all time because they have destroyed so many millions of deposit holders money. Management have no idea whatsoever how to model delinquencies in an economic downturn, in fact they only make a profit in good economic times by under provisioning for bad and doubtful debts across the economic cycle. There is nothing prudent about how this company has been run. Their long term performance has been absolutely appalling. A new generation of gullible investors is currently being taken for a ride. The business model simply does not work across the business cycle.

Provision for Impairment (A)'Net Receivables' + 'Provision for Impairment' (B)(A/B)

Geneva FY2015$29.631m$71.464m41%

Geneva FY2016$29.448m$84.024m35%

I must admit the provisioning is startling. To assume that 35% of your loan book won't be coming back is rather astonishing. Yet all this is disclosed to the banks and shareholders that now fund Geneva. And they must think it is OK! What level of provisioning do you think Geneva should use, given the future outlook?

Every Tom Dick and Harry simply walks away from their debt obligation when the custard hits the fan. You really are wasting your time comparing an apple to an orange and a rotten tomato.

Perhaps I am not wasting my time if I contrast them?

SNOOPY

Beagle

16-05-2017, 11:27 AM

50% Snoopy. Its a 50/50 chance when you make unsecured loans as a fifth tier lender to people who are seeking loans as a lender of almost last resort.
It is most interesting that they dropped their provisioning rate from 41% to 35%. This is how they managed to turn a profit. Pray tell, what basis is there behind such a startling drop to believe this is appropriate across the business cycle ? Note: Their historical provisioning models have quite obviously proven to be insufficient. Are we to believe its different this time ? Yeah right, hand me a Tui...

Major von Tempsky

16-05-2017, 02:43 PM

In the Global Financial Crisis about 50 of NZ's finance companies went bankrupt (practically the entire sector) or entered into arrangements to substantially default. The reason was that the people they lent to refused to repay them so they had no option. They were at that time mostly funded by public debentures which had terms around 5 years so that when the term was up the finance companies couldn't repay nor could they reborrow from the public.

However for some obscure reason Roger is totally fixated on just Geneva to the point that one begins to wonder whether he is coming unhinged.
It would be interesting to know whether Roger pursues the other 49 in his vendetta as well....

Presumably Geneva have been advised by actuaries etc that the risk is less than they had provisioning for so they can now take the opportunity to provision less. Sounds fine to me.

How many GFC's (Global Financial Crisies) have we had since the Great Depression? Answer : 1
Have we not read of all the extra capital requirements and disclosure imposed by Government's and Central Banks since the GFC?

I think Rpoger is being unreasonable.

Beagle

16-05-2017, 03:10 PM

You are perfectly entitled to your opinion. You are not aware of all the shenanigans the company was engaged in that I refer to in post #20 above. Does a leopard change its spots...enough said.

Snoopy

16-05-2017, 05:26 PM

It is most interesting that they dropped their provisioning rate from 41% to 35%. This is how they managed to turn a profit. Pray tell, what basis is there behind such a startling drop to believe this is appropriate across the business cycle ? Note: Their historical provisioning models have quite obviously proven to be insufficient.

Geneva have accounted for an impaired asset release 'refund' in each of FY2015 and FY2016. This would indicate that the provisioning, at least in FY2015 and FY2016, has been sufficient. Furthermore, the impaired asset release of $0.234m in FY2016 came despite the reduction in provisioning.

$54.576m of receivables were on the books as at EOFY2016. The provision for impairment ($29.448m) has already been netted off this figure. If the provisioning had been at FY2015 levels (41%) there would have been a further impairment charge of:

($54.576m + $29.448m) x (0.41-0.35) = $5.041m

Net profit, with tax added back amounted to:

$3.529 + $1.150m = $4.679m

or at the 28% tax rate $4.901m

So Roger is quite correct when he says that it is only the reduction in provisioning that has enabled Geneva to make a profit.

SNOOPY

Snoopy

16-05-2017, 05:44 PM

ROE (return on shareholder equity) is a measure of how efficiently a company can deliver earnings from a given resource of equity. The higher the ROE, the more efficiently the company is using its capital. Net Interest Margin is another measure of efficiency. But this applies only to financial entities, and that doesn't include the adjunct Turners Limited Auction and Fleet business.

Can we identify what is driving these three companies' profits?

Return on Equity (my post 6) is showing a big advantage to Geneva Finance (although this is greatly assisted by the income tax refund for FY2016). The returns from 'Heartland Bank' and 'Turners Finance' are little more than half that being achieved at Geneva Finance. It is informative to observe that the ROE for 'Turners Limited', the whole group, is higher than the 'Turners Finance' subsidiary. Some companies are propped up by their finance division. But in the case of Turners it is the other divisions collectively that prop up finance. (edit: 04-09-2016: the preceding sentence is not true if I redirect the 'interest revenue' and associated profit from the 'automotive retail' segment to the 'finance segment'. In fact it is the finance business that is propping up the retail business). This is good for Turners shareholders, as it is only possible to buy shares in the whole Turners group (dubbed 'Turners Limited': ROE 12.2%).

Return on Shareholder Equity (ROE)

Heartland Bank10.9%

Turners Finance10.6% (04-09-2017: reassessed as 14.3%)

Geneva Limited19.4%

If we now switch to 'Net interest margin' (my post 9) there is a very clear hierachy with Heartland being the 'lowest' (4.35%) and Turners Finance the 'highest' (14.0%) , with Geneva in the middle (10.6%). Of course 'interest margin' is only one component of costs. A more complete measure is 'Net Profit Margin' (my post 22) showing Heartland at (20.1%), Turners Finance at 26.5% (04-09-2017: reassessed as 27.3%) and Geneva at (28.9%).

Net Interest MarginNet Profit Margin

Heartland Bank4.35%20.1%

Turners Finance14.0% (04-09-2017: reassessed as 16.7%)26.5% (04-09-2017: reassessed as 27.3%)

Geneva Limited10.6%28.9%

Perhaps the difference in the relative rankings comes down to how efficient each company is in dealing with non-interest related costs?

Of course 'net interest margin' and 'net profit margin' can equally well be raised by charging a higher interest rate to the borrower. But in an open and competitive finance environment, I feel it is not too much of an oversimplification to say that most of the 'competitive advantage' for each player will depend on how each finance company can control their costs. So for the purpose of this exercise I will ignore any 'premium pricing' that any of these three companies might be able to charge.

Looking at the table below you can see that 'interest expense' makes up a very different part of the total expenses, depending on which company you are looking at.

Interest Expense (% total)Insurance Division Expense (% total)Impaired Asset Expense (% total)Operating Expenses (% total)

Heartland Bank (FY2016)$118.815m (58.8%)N/A$13.501m (6.7%)$69.872m (34.6%)

Dorchester Finance (FY2014)$3.857m (14.2%)$3.765m (13.9%)$0.532m (2.0%)$19.002m (70.0%)

Geneva Limited (FY2016)$3.372m (34.2%)$0.229m (2.3%)($0.234m) (-2.4%)$6.484m (65.8%)

[In the above table I have had to revert to FY2014 results for Turners Limited (or Dorchester as it was then). Because of the subsequent amalgamation of Dorchester with the old Turners Auctions, there is insufficient disclosure for me to compile this table for 'Turners Finance' from the FY2016 results. Nevertheless the core of 'Turners Finance' is the old Dorchester. So these figures should be at least indicative of how 'Turners Finance' operates today.]

It is very apparent from this table that for Turners Finance (Dorchester), 'net interest expense' is a relatively small component of the total expenses (just 14%), compared to Geneva and Heartland. So this could explain why what looks like by far the best 'Net Interest Margin', does not translate to a similarly higher 'Net Profit Margin' compared with the two comparators.

To summarize, 'ROE' and 'Net Profit Margin' are useful indicators of profitability. 'Net Interest Margin' tends to be something that the banks talk about. The greater the scale of interest expense, compared to other expenses, the more important it is. In the case of Heartland Bank, by far the biggest player of the three, interest expense is by far the most significant cost. And once you have established a core 'bricks and mortar' base, leveraging those lease commitments by making more and more lending to customers makes sense. Such a policy will increase even further the importance of interest rate margin. The more traditional finance companies may only have one office nationwide. That saves on rental expenses. But they still need a back office of core people and a cutting edge computer system. Ultimately there are fewer customers to spread these capital costs over. In the case of Turners the high interest margin, while welcome for shareholders, has not translated to similarly outsized profitability. My conclusion is that 'Net Interest Margin' is not a particularly good yardstick with which to measure the profitability of finance companies

SNOOPY

blackcap

16-05-2017, 06:45 PM

$54.576m of receivables were on the books as at EOFY2016. The provision for impairment ($29.448m) has already been netted off this figure. If the provisioning had been at FY2015 levels (41%) there would have been a further iimpairment charge of:

($54.576m + $29.448m) x (0.41-0.35) = $5.041m

Net profit, with tax added back amounted to:

$3.529 + $1.150m = $4.679m

or at the 28% tax rate $4.901m

So Roger is quite correct when he says that it is only the reduction in provisioning that has enabled Geneva to make a profit.

SNOOPY

That's quite scary. So you are saying that if provisioning was held at the same level as prior year there would have been $0.00 or thereabouts profit? That does go to show that they are very reliant on loans coming good and if SHTF, then it could be all over. So keep a good eye on the market if you are in this stock I think.

percy

16-05-2017, 07:15 PM

Quote;
"He who sups with the devil should have a long spoon."

whatsup

16-05-2017, 08:48 PM

I think that what all have said here can be true to a certain degree but IMHO what you all have overlooked is the largest shareholder.
In case you are not aware FPG , a private island trading company owned by Alistair & Alan Hutchison owns 58% of the shares of Geneva he is also a director of Geneva in conjunction with his son Alan.
Alistair Hutchison owns some 24% of CBL a N Z listed company which has M C of a $800 million + .
If one looks up their names in the N Z Companies office you will see a long list of companies which he either owns or is a director of .
Its my betting that there is no way that with his stewardship that Geneva will fail with its rebuild and Im also thinking that there will be some sort of a twist involving either CBL, FPG or the Hutchisons, it could be a long shot but one that should be in the back of investors minds.

Snoopy

18-05-2017, 11:42 AM

A third measure of efficiency is the underlying gearing of the loan book. Put simply, every finance company has an underlying shell, upon which is superimposed funds borrowed from a 'parent bank' (and/or depositor customers) and 'funds loaned' to borrowing customers as 'financial receivables'. With the underlying shell stripped out, investors can get a feel for how far the 'funds loaned' base is leveraged on the 'funds borrowed' base.

There are a couple of ways to present profits in an overexaggerated way. The first is to underestimate the impaired asset position. I look at the declared impaired asset position in relation to the total loan portfolio, including impared assets, to get a feel for this. The second way is to borrow to the hilt against your capital base. My preferred indicator for this is MDRT of 'minimum debt repayment time'. This is a number that answers the question: If all profits were poured back in to repaying debt, how many years would it take to pay off that debt?

Liabilities (Shell) (A)Assets (Shell) (B)(A/B)Provision for Impairment (C)'Net Receivables' + 'Provision for Impairment' (D)(C/D)Minimum Debt Repayment Time (MDRT) -{years}

Heartland Bank FY2015$78.790m (*)$166.311m (*)47.4% (*)$25.412m$2,887.482m0.88%12.1

Heartland Bank FY2016$48.853m$196.389m24.3%$21.161m$3,135.118m0.6 8%9.9

Heartland Bank FY2017$33.335m$170.076m19.6%$25.865m$3,571.762m0.7 2%11.2

Turners Finance FY2015$15.121m$16.801m90%$6.986m$149.813m4.7%

Turners Finance FY2016$13.839m$15.377m90%$6.776m$174.374m3.9%

Turners Finance FY2017$5.342m$5.935m90%$6.028m$213.171m2.8%

Turners Limited FY20157.4

Turners Limited FY20169.8

Turners Limited FY201712.1

Geneva FY2015$8.065m$8.959m90%$29.631m$71.464m41%17.7

Geneva FY2016$13.547m$15.052m90%$29.448m$84.024m35%11.1

Geneva FY2017$18.090m$20.100m90%$29.889m$93.966m26%8.0

(*) These figures from Heartland Reporting Bank

The above is a hyper-table made from three of my posts: 10, 11 and 21. The figures of particular interest are those in the three 'box headed' columns. The table shows that the company with by far the strongest 'shell' (that means all the customer borrowings and lendings have been stripped out) is Heartland Bank (look at column A/B). The strength of a company's shell is important in that it can provide a buffer of funds if some loans go bad.

Look across to column C/D, and you will see that Heartland also has the lowest (in proportional terms) provision for bad loans. Keep looking down that column and you will see that the three companies are more 'comparative' than 'comparable'. The provision for impairment for each finance company is reflective of the market they are loaning to. So different are these markets, the scale of provisioning is an order of magnitude higher as you go down the table. Loaning to a higher risk market is fine if your business model is fully reflective of the higher risk. IOW you will need to be very sure your profit margin is high enough to cover the higher bad debt write offs. One (indirect) measure of how to balance this balance of this risk is 'MDRT'. A company with a low MDRT is more profitable with respect to its underlying debt burden. And higher profitability also indicates a superior ability to deal with bad debts from customers too.

The table shows that 'Turners Limited' (FY2015 perspective) is the best of the three at balancing the risk/reward equation (from an operational prespective). Turners Limited is the parent company of the Turners Finance company we are looking at. As a shareholder we can only invest in the parent 'Turners Limited'.

Roll forward to FY2016 and you can see that the MDRT figures have converged. Heartland now offers the better operational risk reward ratio (although you could argue the difference between the three is no longer significant). But what about as a potential investment?

Put simply the 'operational performance' is what you get. The current share price, the price for investors, reflects what you pay. So the best 'operational performance' might not reflect the best potential 'investment performance' for a new shareholder buying in today going forwards.

This whole post is about 'resilience'. If everything goes really well. then none of these table figures matter. Because none of these companies will need to 'bail out' any more loans than they have already dealt to. Furthermore, 'repaying all underlying company debt' (what MDRT is measuring) is calculated to show what is possible. From a capital efficiency perspective, it could be a bad thing to repay all underlying debt.

SNOOPY

Snoopy

19-05-2017, 10:04 AM

Snoopy

19-05-2017, 07:32 PM

The 'operational performance' is what you get. The current share price, the price for investors, reflects what you pay. So the best 'operational performance' might not reflect the best potential 'investment performance' for a new shareholder buying in today going forwards.

This whole post is about 'resilience'. If everything goes really well. then none of these table figures matter. Because none of these companies will need to 'bail out' any more loans than they have already dealt to. Furthermore, 'repaying all underlying company debt' (what MDRT is measuring) is calculated to show what is possible. From a capital efficiency perspective, it could be a bad thing to repay all underlying debt.

The next question to address is the 'comparative value' of the growth engine question.

A statement contained in the Chairman's annual report from Westpac for FY2016 haunts me:

"Returns of Australian banks are in-line with other leading banking systems and the market. The average return on equity (ROE) of the Australian major banks is currently around 12-15%, broadly similar to other high quality banking markets such as Canada or the Scandinavian countries. That return is above the return of the ASX200 of closer to 11% but below returns of other service industries. Australian major bank returns are above markets such as the UK, parts of Europe and in the US. These markets are under-performing and in many respects are still recovering from the GFC, and as such are delivering performances to which we should not aspire. Separately, while Australian banks make large profits, these profits are in line with their size."

From my post 6, ROE for Heartland Bank was 10.9%, Turners Finance 10.6% (now revised up to 14.3%) and Geneva Finance 19.4% (FY2016 perspective). So Heartland is turning in a pretty average performance from a capital efficiency perspective in comparison with all ASX companies. And they are turning in a less than favourable performance in comparison with Australian banks. The performance of Geneva looks good. But if we look at the last five years (FY2016 perspective) at Geneva the picture changes:

EOFY2012EOFY2013EOFY2014EOFY2015EOFY2016EOFY2017

Geneva Finance NPAT (A)($1.577m)$0.091m($4.201m)$2.194m$3.529m$5.133m

Geneva Finance S/H Equity (B)$10.532m$12.368m$8.314m$16.064m$20.256m$24.862m

Geneva Finance ROE (A)/(B)-15%+0.74%-51%+14%(*)+17%(*)+21%(*)

(*) This figure differs from that previously referred to in the above paragraph (and my post 6) , because it uses a quicker (less accurate) calculation method, which is nevertheless sufficient for this purpose.

Performing a similar exercise for Turners Limited is problematic because the group has been evolving so fast. But if we equate the subsidiary Turners Finance with the old Dorchester, then we can look at a five year historical picture of sorts.

EOFY2012EOFY2013EOFY2014EOFY2015EOFY2016EOFY2017

Dorchester/Turners Finance NPAT (A)($1.543m)($0.133m)$4.892m$4.604m$8.691m$9.019m

Dorchester/Turners Finance S/H Equity (B)$24.167m$33.190m$74.052m$57.82m$63.87m$54.431m

Dorchester/Turners Finance ROE (A)/(B)-7.3%-0.40%+6.6%+8.0%(*)+13.6%(*)+16.6%(*)

(*) This figure differs from that previously referred to in an above paragraph (and my post 6) , because it uses a quicker (less accurate) calculation method, which is nevertheless sufficient for this purpose.
(06-09-2107 edit: earnings figures for Turners Finance restated to retrieve finance income shunted into Automotive Retail segment.)

The equivalent Heartland table is below (From my post 8495 on the Heartland thread):

EOFY2012EOFY2013EOFY2014EOFY2015EOFY2016EOFY2017

Heartland NPAT (A)$30.476m$26.804m$36.039m$47.743m$53.346m$60.355 m

Heartland S/H Equity (B)$374.796m$370.542m$452.622m$480.125m$498.341m$5 69.595m

Heartland ROE (A)/(B)8.1%+7.2%+8.0%+9.9% (*)+10.7% (*)+10.6% (*)

(*) This figure differs from that previously referred to in an above paragraph (and my post 6), because it uses a quicker (less accurate) calculation method, which is nevertheless sufficient for this purpose.

The five year picture shows insufficient ROE consistency (>15% for five years, one setback allowed) to assume that modelling using a future growth model is reliable, for all three protagonists. None of our three protagonists stack up well against the Australian banks record. Even against a basket of other ordinary companies I would rate all three as 'below average'. In this situation I prefer a business cycle 'dividend capitalisation valuation' method to assess these finance companies. Any growth valuation above this must be largely a matter of faith, both in management and in the markets they operate in. Faith based on strong grounds can be rewarding. Faith based on a rocky foundation is more of a gamble.

SNOOPY

whatsup

20-05-2017, 10:11 AM

Barge pole material, not to be trusted under ANY CIRCUMSTANCES, my opinion expressed above remains unchanged.

Roger, Do you by any chance still hold any Geneva residual shares for yesteryear , if so I would be very interested to hear you at this years AGM asking your well researched , in depth questions to the top table, this would give all shareholders a chance to judge for them selves just how much risk there is for all share holders ?

Snoopy

20-05-2017, 11:43 AM

The next question to address is the 'value' question.

When valuing finance companies, I find it useful to remember that not all of the loan books are of the same quality. Any shareholder should require a higher return on those fainance companies operating in the more risky part of the investment spectrum.

CategoryExampleAcceptable Yield

Tier 1 Finance Industry CompanyANZ Bank6.5%

Tier 2 Finance Industry CompanyHeartland Bank7.5%

Tier 3 Finance Industry CompanyGeneva Finance8.5%

I have left Turners Finance out of this table, because as a shareholder you cannot invest in it, without investing in the whole 'Turners Limited' group. Logic suggests that Turners Finance might be a Tier 3 proposition. Yet because of the strong position Turners holds in the retail vehicle market, I would regard a gross dividend yield rate of 7.5% as acceptable in this investment context.

SNOOPY

noodles

20-05-2017, 08:06 PM

EOFY2012
EOFY2013
EOFY2014
EOFY2015
EOFY2016

Geneva Finance NPAT (A)
($1.577m)
$0.091m
($4.201m)
$2.194m
$3.529m

Geneva Finance S/H Equity (B)
$10.532m
$12.368m
$8.314m
$16.064m
$20.256m

Geneva Finance ROE (A)/(B)
-15%
+0.74%
-51%
+14%
+17%(*)

Snoopy,

Could it be that the FY16 Geneva ROE looks good because you are using the statutory NPAT number?
Perhaps you should normalize NPAT to remove tax credits and assume 28% tax. Only then could you possibly do a comparison.

Beagle

21-05-2017, 12:54 PM

Roger, Do you by any chance still hold any Geneva residual shares for yesteryear , if so I would be very interested to hear you at this years AGM asking your well researched , in depth questions to the top table, this would give all shareholders a chance to judge for them selves just how much risk there is for all share holders ?

Sorry all our family shares were dumped immediately upon listing at an average of 13 cps, (years before the 7:1 share consolidation so equates to 91 cps now)...you might like to have a think about what the long term SP performance suggests about the companies business model. Repost of my 20 June 2016 post from the other thread titled "Be Very Careful Folks"

Be VERY careful folks, Some facts to consider
1. Many finance companies survived the GFC.
2.. First ranking debenture holders had to take 15% of their debenture value as shares at circa 35 cents per share, now worth a mere fraction of that.
3. Millions of dollars was invested in unsecured subordinated notes and these investors were forced to take close to half of the value of their investment in shares at circa 35 cps, now only worth a fraction of that so have taken a very serious haircut.
4. The company has an extremely chequered history and has made some very interesting calls on what loans are bad, doubtful and restructured in the past.
5. I know for a fact that they used to use the old cleanse the balance sheet just before balance date by selling a lot of horribly overdue loans into their side company Stellar Collection at full face value rather than taking an appropriate write-off on those loans as a means of artificially propping up the profitability / minimising losses to paint a far more rosy picture of their financial performance than what would otherwise have been the case.

I can't help wondering if they use the same old tricks to inappropriately avoid losses on bad / doubtful debts these days ? Does a leopard change its spots or a Tiger change its stripes ?.
I see David OConnell was in charge back then and still is. Hmmm

I put a LOT of stock on a companies track record in terms of assessing the credibility of management and the credibility of their "reported results". When looking at a companies track record I assess their entire track record not just the last year or two. Easy to manipulate one or two years financial results...anyone remember how Fay Richwhite manipulated the profit of Tranz Rail by doing grossly insufficient maintenance on the railway lines ?

Reported results for bank and finance companies involved a whole lot of subjective assessment of loans in terms of what's overdue, past due, doubtful and truly bad debt and Geveva finance's track record in this HIGHLY subjective process is something investors might like to consider.
Disc: Don't own, not to be considered professional advice or a recommendation, DYOR)

Bit of extra emphasis added. Questions you might like to ask ? How is it that their bad and doubtful debt provisioning rate has reduced so much in FY17 and if this hadn't changed they would have made a loss ? Could it be that the bank financing them would have been deeply unhappy about a loss ? What has changed in their business model that makes them believe across the full business cycle that their new considerably lower provisioning rate is adequate ? Questions for their auditors.
Is the former practice of selling doubtful receivables at full value to Stellar collections still continuing ? Why do you think this doesn't give a disingenuous view of Geneva Finance's profitability when the likely recovery rate could be far less than dollar for dollar ?

Snoopy

22-05-2017, 01:50 PM

Snoopy,

Could it be that the FY16 Geneva ROE looks good because you are using the statutory NPAT number?
Perhaps you should normalize NPAT to remove tax credits and assume 28% tax. Only then could you possibly do a comparison.

I will go with your suggestion Noodles. Let's see what happens. I have removed the 'income tax credit effect' from the results for FY2015 and FY2016. (There was no income tax credited in the previous three years). So the table below gives an 'ongoing operational perspective' on the Geneva profit.

EOFY2012EOFY2013EOFY2014EOFY2015EOFY2016

Geneva Finance NPAT (A)($1.577m)$0.091m($4.197m)$1.548m*0.72$2.379m*0. 72

Geneva Finance S/H Equity (B)$10.532m$12.368m$8.314m$16.064m$20.256m

Geneva Finance ROE (A)/(B)-15%+0.74%-50%+6.9%+8.6%

As you hinted at Noodles, the ROE record looks much less impressive presented like this. Yet presumably it is the income tax credits that have helped provide the cashflow that has allowed directors to declare a dividend from FY2015 and FY2016 results? Since I valued Geneva (on the Geneva thread) on its dividend paying ability, I might argue that the declared profit perspective is still the better one to use.

SNOOPY

Snoopy

26-05-2018, 08:31 PM

Snoopy

26-05-2018, 08:53 PM

I wondered if there was something in the large database that makes up this thread that could explain this?

Let's find out!

A comparison of historical PE ratios is a comparison of earnings expectations. On 30/09/2015 the expectations of Turners were clearly higher than Heartland and Geneva.

Date: -->30th September 201530th September 201630th September 2017

Heartland Bank: Share Price /Historical PE:$1.12 / 11.0$1.51 / 13.5$1.80 / 15.4

Turners Automotive Group: Share Price / Historical PE:$2.65 / 19.9$3.08 / 12.8$3.24 / 14.9

Geneva Finance Limited: Share Price / Historical PE:$0.31 / 7.1$0.41 / 8.2$0.58 / 7.5

The 30th September date is not far enough into the coming financial year for the half year result figure for any of the three companies to be released. The most current earnings season results, as reported to the market, are in the table below:

Time Period: -->12m to Balance Date 201512m to Balance Date 201612m to Balance Date 2017

Heartland Bank Earnings:10.1cps11.2cps (+11%)11.7cps (+4.5%)

Turners Automotive Group Earnings:13.6cps24.2cps (+77%)21.7cps (-10.0%)

Geneva Finance Limited Earnings:3.1cps5.0cps (+61%)7.3cps (+46%)

------

Notes

1/ Balance date for Heartland Bank is 30th June.
2/ Balance date for Geneva Finance Limited and Turners Automotive Group is 31st March
3/ Refer to 'Chapter 2' (in this thread) for normalised 'eps' figures .

------

Look forwards for one year to September 2016 and you will see that the Turners earnings increase (+77%) largely did reflect the PE expectations (PE = 19.9) from a year earlier. Yet surprisingly, the Geneva increase in earnings was almost as good over the same time period. So did Mr Market, with that relatively modest Geneva PE expectation of 8.2 in September 2015, preceding a 61% increase in profits over the next year, get it wrong?

Another explanation is that perhaps the market did not believe the profits stated by Geneva were credible. Yet one family of statistics can always be regarded as credible: those figures based on cash. As at 30th September 2016, the historic gross yield for Geneva was:

1.5c / 41c = 3.7%

Thus in dividend yield terms the historical yield for Geneva come September 2016 was still modest, something that may have provided a handbrake to Geneva share price appreciation over that one year period. That dividend in itself was the first in modern memory.

Historical 'earnings per share' are a future indicator of what level of dividends might be expected.

Cash offered to holding shareholders comes by way of the net dividend.

A share price is liable to react badly if the actual dividends (cash returns) do not meet expectations.

Date: -->12m to 30th September 201512m to 30th September 201612m to 30th September 2017

Heartland Bank Dividend:6.0cps7.5cps (+25%)8.5cps (+13%)

Turners Automotive Group Dividend:7.2cps12.36cps (+72%)11.5cps (-7.0%)

Geneva Finance Limited Dividend:none1.5cps (+NM%)2.0cps (+33%)

Dividends per share represent the actual cash return to shareholders.

SNOOPY

Snoopy

19-11-2018, 08:57 AM

I have been busy extensively updating this thread with the 2017 data relating to our three finance company protagonists: Heartland Bank (HLB), Turners Automotive Group (TRA) and Geneva Finance (GFL). If you read the 'Chapters' in the thread again, you will see the changes. With more data available it is interesting to see further patterns emerging. All three can be thought of as finance companies, although it is more correct to say that TRA contains an in house finance operation that supplies most of the group profits.

Date: -->30th September 201530th September 201630th September 201726th May 2018

Heartland Bank Share Price:$1.12$1.51 (+35%)$1.80 (+19%)$1.82

Turners Automotive Group Share Price:$2.65$3.08 (+16%)$3.24 (+5.1%)$2.92

Geneva Finance Limited Share Price:$0.31$0.41 (+32%)$0.58 (+41%)$0.62

Shareholders in both 'Heartland' and 'Geneva' had a good couple of years, measured at the period ending 30th September 2017. Both shares continued to rise in value after that date, with the prices retreating back towards those September 2017 levels at today's date. 'Turners' shareholders did not enjoy the same capital appreciation over this time period. I wondered if there was something in the large database that makes up this thread that could explain this?

Let's find out!

I have been busy extensively updating this thread with the 2018 data relating to our three finance company protagonists: Heartland Bank (HBL/HGH), Turners Automotive Group (TRA) and Geneva Finance (GFL). If you read the 'Chapters' in the thread again, you will see the changes. With more data available it is interesting to see further patterns emerging. All three can be thought of as finance companies, although it is more correct to say that TRA contains an in house finance operation that supplies most of the group profits.

Date: -->30th September 201530th September 201630th September 201730th September 201819th November 2018

Heartland Bank Share Price:$1.12$1.51 (+35%)$1.80 (+19%)
$1.73 (-3.9%)$1.52

Turners Automotive Group Share Price:$2.65$3.08 (+16%)$3.24 (+5.1%)
$2.95 (-9.0%)$2.76

Geneva Finance Limited Share Price:$0.31$0.41 (+32%)$0.55 (+34%)
$0.57 (+3.6%)$0.53 (bid)

Only 'Geneva' had a positive twelve months, measured at the period ending 30th September 2018. All three protagonists have taken a similar percentage hit since 30th September 2018. All three have underperformed the index over the last September to September rolling twelve month period.

SNOOPY

Snoopy

20-11-2018, 09:58 PM

Should be ‘perplexed’ about the current share price

Not making much of a return on its total invested capital (including debt). Some analysts might say not covering its cost of capital

That is one of my dislike with TRA, as far as I can see the cost of capital and the return on capital are both hovering around the 5 to 6%.

Excuse me for switching my comments on cost of capital from the 'main' Turners thread to this one.

'Cost of capital' has a particular meaning in financial analysis, being a weighted hybrid concoction of bank interest rates and share price volatility. But if we take the literal meaning, in the case of Turners 'the cost they must pay to the bank to borrow funds', this is now 4.5% to 5.5%. They have 'learned their lesson' about not constantly tapping shareholders for new funds.

If you look at Chapter 3 (post 6 in this thread) you can see that return on equity for Turners over FY2018 was 9.9% (excluding one offs). Yes it could be better, and it is bettered by HBL (10.2%) and GFL (22.7%). But it is still well above any practical cost of capital that TRA might seek. If you look at the finance division within TRA, then ROE jumps to 16.5%.

This year will see Turners focus on sorting out their in house growth rather than buying growth via acquisitions and that should further boost ROE. I don't see that Turners not achieving a return above their cost of capital.

SNOOPY

Snoopy

21-11-2018, 09:06 AM

Bad debts did increase with poor non-recourse lending via MTF. This has been rectified by Turners tightening their non-recourse lending citeria,so the "bad loans" are running their course.I think maybe another 6 months or so will see the end of them.TRA are no longer dealing with some MTF originators.
Also adding to Turners margin, Turners are no longer putting about $4mil a month of Turners originated loans through MTF. They are putting them through their own Oxford Finance.

I have transferred my thoughts from the main Turners thread to this one, because this one contains the data to back up the point I want to make. If you look at Chapter 6 (post 11 on this thread), you will see that the 'Turners Finance' (Oxford Finance plus the old Turners Auction finance division added together) provision for impairment did go up in FY2018. In dollar terms it is by far the largest it has ever been. But the loan book has grown a lot in recent years. If you skip FY2017, the impaired loan position at EOFY2018 is actually the lowest it has been since TRA was incarnated in its current form, in percentage terms.
In my view the anomaly in all of this was FY2017, when the proportion of 'Provision for Impairment' to 'Total Loan Book' was abnormally low. The big jump in the impairment provision percentage at the end of FY2018 looks to me more like bringing provisioning back to more normal levels.

12-18 months is the impression I got from the annual meeting as to how long those problematic loans will affect the company.

In one sense I think Beagle is being optimistic. But there are two distinct steps in dealing with potentially bad loans:

1/ Make an 'impairment provision expense'. For FY2018, from the TRA income statement, this was $6.380m, a figure that raised eyebrows when only $2.026m was loaded into the impairment provision account in the previous year.
2/ Write off debts that are proven uncollectable. You have to go to note 14 in the TRA accounts to see what happened here. The sum of collective and specific write offs over FY2018 were:

$0.875m + $0.653m = $1.528m [ c.f. $1.539m + $0.054m = $1.593m over FY2017 ]

Overall there wasn't much difference 'year on year' in actual write offs.

Given the quantum of figures in point 2/, we can argue that the $4.354m jump in impaired asset provisioning, may take more than an incremental two years to 'work through the bad debt system' (I think this is the point Beagle was making). However, because all of these provisions are already in the system, I expect no further effect at all from the rag tag of doubtful debts on the MTF loans going forwards on Turners profits .

SNOOPY

winner69

21-11-2018, 09:57 AM

Excuse me for switching my comments on cost of capital from the 'main' Turners thread to this one.

'Cost of capital' has a particular meaning in financial analysis, being a weighted hybrid concoction of bank interest rates and share price volatility. But if we take the literal meaning, in the case of Turners 'the cost they must pay to the bank to borrow funds', this is now 4.5% to 5.5%. They have 'learned their lesson' about not constantly tapping shareholders for new funds.

If you look at Chapter 3 (post 6 in this thread) you can see that return on equity for Turners over FY2018 was 9.9% (excluding one offs). Yes it could be better, and it is bettered by HBL (10.2%) and GFL (22.7%). But it is still well above any practical cost of capital that TRA might seek. If you look at the finance division within TRA, then ROE jumps to 16.5%.

This year will see Turners focus on sorting out their in house growth rather than buying growth via acquisitions and that should further boost ROE. I don't see any problem with Turners not achieving a return above their cost of capital.

SNOOPY

Snoops - Have you ever considered the returns Turners are making on total invested capital ....and not just on equity?

Might give you a fright if you consider debt and other borrowings.

Snoopy

03-12-2018, 09:38 PM

Snoops - Have you ever considered the returns Turners are making on total invested capital ....and not just on equity?

Might give you a fright if you consider debt and other borrowings.

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

Normalised Profit (A)Shareholder Funds SOFYShareholder Funds EOFYShareholder Funds (average) (B)ROE (A/B)

Heartland FY2015$47.477m$452.622m$480.125m$466.374m10.2%

Heartland FY2016$52.706m$480.125m$498.341m$489.233m10.8%

Heartland FY2017$59.316m$498.341m$569.595m$533.968m11.1%

Heartland FY2018$62.893m$569.595m$664.160m$616.878m10.2%

Heartland FY2019$74.532m$664.160m$675.668m$669.914m11.1%

Turners Limited FY2015$8.595m$74.052m$121.002m$97.527m8.8%

Turners Limited FY2016$15.332m$121.002m$129.812m$125.007m12.2%

Turners Automotive Group FY2017$16.261m$129.812m$171.716m$150.764m10.8%

Turners Automotive Group FY2018$19.085m$171.716m$214.323m$193.012m9.9%

Turners Automotive Group FY2019$xx.xxxm$214.323m$226.374m$220.349mx.x%

Turners Finance FY2015$4.604m$38.44m$57.82m$48.13m9.6%

Turners Finance FY2016$8.691m$57.82m$63.87m$60.85m14.3%

Turners Finance FY2017$9.019m$63.869m$54.431m$59.150m15.2%

Turners Finance FY2018$10.564m$54.431m$74.018m$62.224m16.5%

Turners Finance FY2019$9.097m$74.018m$72.205m$73.112m12.4%

Geneva FY2015$2.194m$8.386m$16.054m$12.220m18.0%

Geneva FY2016$3.529m$16.054m$20.256m$18.155m19.4%

Geneva FY2017$5.133m$20.256m$24.862m$22.559m22.8%

Geneva FY2018$6.123m$24.862m$29.168m$27.015m22.7%

Geneva FY2019$4.210m$29.168m$29.396m$29.282m14.4%

Note: Turners Finance results have been adjusted by reallocating 'interest revenue' and implied 'interest revenue profits' (see my post 1551 on the TRA thread) from the 'automotive retail' segment to the 'finance segment'. These finance figures do not include any contribution from the insurance or EC Credt business segments.

There is more than one way to interpret 'Return on Invested Capital'. But since Winner started this thread, I am going to use the 'Winner' definition.

Winner's formula is:

ROIC =[{A}+{B}+{C)]x{D}/[({EE}+{ES})/2 +({DE}+{DS})/2]

And what all those letters stand for can be referenced in the data table below.

NPAT {A}Tax Paid {B}Interest Expense {C}
After Tax Multiplier {D}
S/h Equity EOFY {EE}
S/h Equity SOFY {ES}
Borrowings EOFY {DE}
Borrowings SOFY {DS}
ROIC

Geneva Finance

FY2019
$4.210m$1.040m$4.232m
(1-0.28)
$29.316m$29.168m
$73.009m$59.921m
7.1%

FY2018
$6.123m($1.599m)$3.584m
(1-0.28)
$29.168m$24.862m
$59.921m$54.077m
7.0%

FY2017
$5.133m($1.318m)$3.456m
(1-0.28)
$24.862m$20.256m
$54.077m$45.258m
7.3%

FY2016
$3.529m($1.150m)$3.372m
(1-0.28)
$20.256m$16.064m
$45.258m$33.882m
7.2%

FY2015
$2.194m($0.646m)$3.075m
(1-0.28)
$16.064m$8.386m
$33.882m$28.539m
7.7%

Turners Automotive Group

FY2018
$19.085m$7.773m$14.344m
(1-0.28)
$214.323m$171.716m
$317.373m$265.889m
6.1%

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

Normalised Profit (A)Shareholder Funds SOFYShareholder Funds EOFYShareholder Funds (average) (B)ROE (A/B)

Heartland FY2015$47.477m$452.622m$480.125m$466.374m10.2%

Heartland FY2016$52.706m$480.125m$498.341m$489.233m10.8%

Heartland FY2017$59.316m$498.341m$569.595m$533.968m11.1%

Heartland FY2018$62.893m$569.595m$664.160m$616.878m10.2%

Heartland FY2019$74.532m$664.160m$675.668m$669.914m11.1%

Turners Limited FY2015$8.595m$74.052m$121.002m$97.527m8.8%

Turners Limited FY2016$15.332m$121.002m$129.812m$125.007m12.2%

Turners Automotive Group FY2017$16.261m$129.812m$171.716m$150.764m10.8%

Turners Automotive Group FY2018$19.085m$171.716m$214.323m$193.012m9.9%

Turners Automotive Group FY2019$xx.xxxm$214.323m$226.374m$220.349mx.x%

Turners Finance FY2015$4.604m$38.44m$57.82m$48.13m9.6%

Turners Finance FY2016$8.691m$57.82m$63.87m$60.85m14.3%

Turners Finance FY2017$9.019m$63.869m$54.431m$59.150m15.2%

Turners Finance FY2018$10.564m$54.431m$74.018m$62.224m16.5%

Turners Finance FY2019$9.097m$74.018m$72.205m$73.112m12.4%

Geneva FY2015$2.194m$8.386m$16.054m$12.220m18.0%

Geneva FY2016$3.529m$16.054m$20.256m$18.155m19.4%

Geneva FY2017$5.133m$20.256m$24.862m$22.559m22.8%

Geneva FY2018$6.123m$24.862m$29.168m$27.015m22.7%

Geneva FY2019$4.210m$29.168m$29.396m$29.282m14.4%

SNOOPY

Note: Turners Finance results have been adjusted by reallocating 'interest revenue' and implied 'interest revenue profits' (see my post 1551 on the TRA thread) from the 'automotive retail' segment to the 'finance segment'. These finance figures do not include any contribution from the insurance or EC Credt business segments.

FY2017
$16.261m$7.057m$11.350m
(1-0.28)
$171.716m$129.812m
$265.889m$174.816m
6.7%

FY2016
$15.332m$5.949m$11.436m
(1-0.28)
$129.812m$121.002m
$174.816m$156.995m
8.1%

FY2015
$8.595m$0.856m$7.381m
(1-0.28)
$121.002m$74.052m
$156.995m$17.565m
6.6% (*)

Heartland

FY2019
$74.532m$27.896m$136.747m
(1-0.28)
$675.668m
$664.160m
$1,056.653m
$914.253m
10.4%

FY2018
$62.893m$26.781m$125.483m
(1-0.28)
$664.160m$569.595m
$914.253m$855.762m
10.3%
609m

FY2017
$59.316m$23.745m$115.169m
(1-0.28)
$569.595m$498.341m
$855.762m$717.111m
10.8%

FY2016
$52.706m$20.024m$118.815m
(1-0.28)
$498.341m$480.125m
$717.111m$727.787m
11.4%

FY2015
$47.477m$16.173m$126.041m
(1-0.28)
$480.125m$452.622m
$727.787m$787.709m
11.2%

(*) means 'possibly not meaningful'

SNOOPY

Baa_Baa

03-12-2018, 10:07 PM

Is that formulae a quote? It has some yukky and redundant {} in it.

Snoopy

03-12-2018, 11:15 PM

Is that formulae a quote? It has some yukky and redundant {} in it.

I suppose I could have written Winner's formula (as I understand it) as below:

ROIC =D[A+B+C]/[(EE+ES)/2 +(DE+DS)/2]

Or maybe you prefer to read it this way:

ROIC = (1-'company tax rate')[ NPAT + Tax Paid + Interest Expense] / ['Average Equity Employed' + 'Average Borrowings Employed']

SNOOPY

Snoopy

04-12-2018, 01:57 PM

There is no one statistic that is 'best' for analysing business efficiency. But sometimes comparing and contrasting different approaches can provide a deeper insight into the relative usefulness of two: in this case 'Return on Shareholder Equity' (ROE) and 'Return on Investor Capital' ROIC.

A company with a high ROE could indicate that it is undercapitalised, relying too much on external debt to keep the business going. A countercheck on this possibility is to look at ROIC, because this statistic looks at the return on the sum of shareholder equity AND borrowed money. Put simply, if ROE is high but ROIC is low, this could be a warning sign not to invest. However having a high ROE and a lower ROIC is not necessarily a bad thing. It could also be an indicator that the company has optimised their capital structure to maximise their returns to equity holders. Companies that operate in stable markets and have significant market share can be, by design, set up this way. Yet generally those businesses in second tier finance (Heartland), third tier finance (Turners) or fourth tier finance (Geneva) would not fall into this category. This doesn't mean these businesses are necessarily unsound. But it does mean they are likely to come under pressure over high stress periods within the business cycle.

Of the two indicators, I prefer to use ROE because:

1/ ROE is a little bit easier to calculate (and if a simpler calculation does a satisfactory job measuring 'business efficiency', then you should think twice about doing something more complex to provide a similar indication).

2/ ROE measures something that shareholders 'own' (the company equity). ROIC OTOH also measures company debt. Shareholders have ultimate responsibility for company debt repayment. But the debt is almost always owned by some-one else. So IMO, ROIC is an inferior indicator of shareholder returns.

As a long term shareholder (5 to 10 year horizon) I am interested in sustainable returns. This is why I have taken out what I consider 'one offs' and have used normalised profits to calculate ROE. By contrast other stakeholders that hold the debt -like banks or debenture holders- generally want their money back, or at least want to renegotiate terms before then. And banks just want to be paid back, and are unconcerned whether a company they lend to does this by using underlying earnings or one off sales of parts of the business or other windfall profits. So for my ROIC calculations I use headline profits. I am not claiming this is the 'right' way to do things. I am just explaining why I have done it this way.
(Edit: I have changed my mind and now use normalised profits for both, as this better facilitates a comparison).

I have tended to think of 'equity' and 'debt' as distinct and separate 'drawers' of, -to use a furniture analogy- a 'funding chest of drawers'. However, those of you who have ever used such a piece of furniture have probably noticed that if you go on a credit card spending spree and fill the top drawer with new clothes, while the bottom drawer (representing equity) remains empty, then the whole chest of drawers can become unstable. And fiddling with the top drawer alone can cause the whole chest to fall over. What I am hinting at here is that there needs to be a balance between equity and debt to keep a business on an even keel.

To use Turners as an example (they have the weakest ROIC of the three from an FY2018 perspective), we know they can borrow at 4.5% to 5.5% (FY2018 perspective) and ROIC was 6.1% for FY2018. So therefore any borrowing that Turners has is 'adding value'. However, this logic is akin to the person who has a two story 'financial chest of drawers' and is only concerned with pulling things in and out of the top drawer, while completely ignoring what is in the bottom drawer. So how do we bring what is in the bottom drawer into the equation to make sure that the company 'financial chest of drawers' remains balanced?

One way to do this is to assume that company equity is not 'free', but there is a cost for the shareholders to hold it. The cost most shareholders fear is that the market share price will go down and they will lose money. If you have a stable industry, then simply being a major player (top three in that market) is a good indicator that you are in a stronger position than those lesser market players. Such a company is liable to be less 'downside volatile' than the market in general. By contrast 'upward volatility', where a company makes a breakthrough (and major market players are the more likely to make short term breakthroughs) is a good kind of volatility risk that we shareholders want. Yet, the longer the term you wish to hold a particular share, the less important share price volatility, on a daily basis, becomes.

One mathematical technique for assessing the total cost of capital (a weighted sum cost of debt capital and equity capital) is called the CAPM or 'Capital Asset Pricing Model'. However, the equity weighting component in this model does not differentiate between 'negative volatility' (we investors do not want to see our share price plunge) and 'positive volatility' (we investors do want to see our share price soar). It also uses past share price volatility (that might have occurred while a business was restructuring for example) as an indicator of future share price volatility which -after any restructuring is completed- is likely to be lower.

By

1/ Discounting for a risk that is positive and desired by shareholders AND
2/ Likely Mis-estimating future share price volatility,

the CAPM ,in my opinion, gives an inaccurate assessment of future share capital cost - an estimate that is generally too high. For these reasons I prefer to use my own industry estimates to assess equity capital costs, and break away from the implicit CAPM assumption that 'volatility' is a proxy for 'risk', when in fact they are (day traders excepted) entirely different things.

Readers may at this point accuse me of rambling off topic. So I want to bring things back to the ROE vs ROIC debate so that you can see why the above couple of paragraphs were not off topic rambles.

ROE does not consider the 'cost of equity capital', as such. Equity capital is looked upon as a simple resource. And NPAT is a measurable return on that resource. So ROE is in reality a simple ratio that can be used to measure how well a business is doing relative to other businesses. There is no particular 'stake in the ground' that the market puts on businesses that determines what the ROE of any particular business should be. ROE is dependent on 'business inputs'.

In the case of ROIC, the return on the 'debt' part of that invested capital is tied to the market, because the source of that capital must come from the market (not as a rule, from you as a shareholder). So now we need a tool, a measuring stick if you like, to make sure the business proposition put up is worth funding by 'the market'. One tool to make this assessment is the Capital Asset Pricing Model. This is a tool that is well accepted in the market as one way (some think it is the only way) to assess how high the 'funding hurdle' should be, and so assess how viable funding a particular enterprise is. ROIC is dependent on 'business inputs' and 'wholesale market inputs'. The problem with ROIC that I have is that 'wholesale market inputs' are not within the control of the business. For me this weakens ROIC as an indicator of preference.

SNOOPY