Very tightly held for a reason, its a 3 year plan imo.
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all time high today and with the upcoming AGM there could be more " good news " .
Yeehar! I'm holding tightly. Glad I don't have any Fletcher :-)
For the risk averse, time to review some Geneva Finance covenants for FY2017
Shareholder Equity $24.862m less Intangibles $0.471m less Deferred tax $3.114m Total Available Asset Base $21.277m
Financial Assets at fair value thru P&L $0.475m plus Financial Receivables $64.077m plus Other Receivables & Deferred Expenses $0.011m + $$1.400m Total Receivables $65.963m
So check :
Total Available Asset Base > 0.2x (Total Receivables)
=> $21.277m > 0.2 x $65.963m = $13.193m (true)
=> Geneva passes the Available Equity to Receivable Loan book test.
I have tried to be consistent in my finance company tests. The idea that a company should possess ready access to cash that covers twenty percent of the loan book originates from a banker's view of what the restructured 'PGG Wrightson Finance' (since taken over by Heartland) balance sheet should look like. Over the years, I was absolutely rubbished for this view when I applied it to Heartland itself, on the Heartland thread. Yet almost all the other finance companies I looked at seemed to have little trouble complying with this standard. In the end, because of the improving quality of the Heartland loan book, I relented on my requirement and set a new standard of 17% of the receivables book as easily accessible cash.
Back to Geneva, note 16 detailing the finance receivables shows a 'provision for credit impairment' of $29.889m on total gross financial receivables of $94.645m. This represents an impairment rate of:
$29.889m / $94.645m = 32%
The question then has to be asked. Is my 'stress test scenario' looking for 20% of the value of the 'loan book capital' to be available to be drawn down at short notice a big enough buffer considering that in 'normal operations' 32% of the loan book is already impaired? In this instance my capital requirement is based on the net loan book. The net loan book is only 68% of the gross loan book. So my requirement is for the company to have:
0.68 x (1-0.2) = 0.544 so 1-0.544 = 45.6% of the loan book value 'covered' for possible evaporation.
That is quite a high standard IMV, which must give some confidence to shareholders.
SNOOPY
Current Financial Assets Reference Cash & Cash Equivalents $11.072m Balance Sheet FY2017 Financial Assets at fair value thru P&L $0.475m Balance Sheet FY2017 Financial Receivables 0-12 months (contractual) $24.023m Note 16 Total Current (contractual) $35.570m (addition) Current Financial Liabilities Reference Total Current (contractual) $20.491m Note 30 Other Cash Source Reference Borrowing Headroom $2.246m Note 19 ($45m) & Note 30 ($42.754m)
Now we can use the above information for the liquidity buffer test:
($35.570m + $2.246m) = $37.816m > 1.1 x $20.491m = $22.540m (true)
=> Geneva passes the liquidity buffer ratio test
This is an easy pass. But investors also need to remember that Geneva carries a very high proportion of impaired loans on their books. So a lot more liquidity than 'normal' is probably a necessity.
SNOOPY
Updating the above FY2016 test for FY2017:
Geneva does not quote EBIT figures directly. So I have calculated it by taking 'Net Profit Before taxation' (EBT) and adding back into that the interest expense.
(EBT + I)/ I
= ($3.815m + $3.458m)/ $3.458m = 2.10 > 1.2 (test standard)
=> Geneva passes the EBIT to interest expense test.
I have wondered about the reasoning for constructing this test in this way. I think it is obvious that if you were a major lender to a finance company, then you would be very interested in that finance company's ability to pay interest on your loan. 'Earnings before Interest and Tax' is exactly what it says. The are two conceptual problems I have with this statistic.
1/ Most companies do have to pay tax, and a tax debt to IRD takes precedence over bank creditor interest (IIRC). So as a lender, I would be interested in a company's ability to pay after they had paid their tax, not before.
2/ A company's must pay interest out of its underlying earnings. The more you earn the more you can borrow is the equation. Adding borrowing costs to underlying earnings will reduce those earnings. Generally most listed companies do have bank loans. So isn't a cleaner measure of the ability to make repayments NPAT with those interest costs already removed?
To me it looks like 'NPAT / I ' is a better measure of the ability to repay than 'EBIT / I'.
SNOOPY
Geneva is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.
The table below has taken items from the balance sheet (marked (1)), and used those numbers to generate other numbers in the prescribed order ( (2),(3),(4),(5) )
Assets Liabilities Shareholder Equity Not Underlying Finance $20.100m (2) - $18.090m (3) = $2.010m (5) Underlying Finance $64.077m (1) - $41.225m (4) = $22.852m (5) Balance Sheet Total $84.177m (1) - $59.315m (1) = $24.862m (1)
Calculation (2) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:
(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9
From this, we can work out that the Non-Risk Liabilities must be no more than:
(Non-Risk Assets) x 0.9 = $20.100m x 0.9 = $18.090m (which is answer 3 above).
Simple subtraction and addition is then used to work out the rest of the numbers in the table.
So what's the point of this so far?
By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for Geneva. This is done by looking at the assets and liabilities left outside the core.
Implied Available Financing Gearing ratio
= (Finance Division Liabilities)/(Finance Division Assets) (*)
= $41.225m/$64.077m
= 64.3%
(*) Finance Division also incorporates insurance assets
Generally you would want to compare your 'Finance Division Liabilities' with your 'Finance Division Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities? Geneva have slightly reduced their risk profile from FY2016. But the 'Turners Finance' division of 'Turners Automotive' in FY2016 (my post 1272 on the Turners thread) had a much lower financing gearing ratio at 48.6%.
SNOOPY
EOFY2017 EOFY2016 Average Cash/Cash Equivalents $11.072m $8.025m $9.549m Investment Assets Saleable $3.190m $3.031m $3.111m Finance Receivables $64.077m $54.576m $59.327m Total $71.986m
Interest Margin = [(Interest Received) - (Interest Expenses)] / [Average Cash Earning assets plus Actual cash for Year]
= [$11.357m -$3.456m] / $71.986m
= 11.0%
It is interesting to compare that figure with that of Heartland that increased to 4.4% for FY2016 and is forecast to increase again. Heartlanders seem very happy with that '4.4% and rising' beating all the other banks. But start stacking 4.4% up against other finance companies and it doesn't look so clever.
SNOOPY