Impairment in the Bigger Picture: FY2017 View
Quote:
Originally Posted by
Snoopy
|
Impaired Asset Expense (A) |
Provision for Impairment (B) |
Net Receivables (Including impairment) (C) |
(B/C) |
Normalised EBIT (excluding Impaired asset expense) (D) |
(A/D) |
FY2015 |
-$0.897m |
$29.631m |
$71.461m |
41% |
$3.768m |
-24% |
FY2016 |
-$0.234m |
$29.448m |
$84.024m |
35% |
$5.517m |
-4.2% |
Something strange is going on here. Impaired assets are being written
up in value, not down, each year (hence negative impared asset expense). Is there an explanation?
|
Impaired Asset Expense (A) |
Provision for Impairment (B) |
Net Receivables (Including impairment) (C) |
(B/C) |
Normalised EBIT (excluding Impaired asset expense) (D) |
(A/D) |
FY2015 |
-$0.897m |
$29.631m |
$71.461m |
41% |
$3.768m |
-24% |
FY2016 |
-$0.234m |
$29.448m |
$84.024m |
35% |
$5.517m |
-4.2% |
FY2017 |
$0.315m |
$29.889m |
$93.966m |
32% |
$7.622m |
+4.6% |
We have returned to the more normal situation of impaired assets are being written down in value. The provision for bad debts to gross receivables (net receivables including impairment) remains at eye wateringly high levels, albeit slightly down on the previous year. But that seems to be the way that the Geneva business model works. Yet the impaired asset expense as a percentage of earnings remains modest.
SNOOPY
Return on Equity: the most representative way to calculate it?
The return on Equity figures for Geneva Finance, as published for the last few years are tabulated below:
|
EOFY2012 |
EOFY2013 |
EOFY2014 |
EOFY2015 |
EOFY2016 |
EOFY2017 |
Geneva Finance NPAT (A) |
($1.577m) |
$0.091m |
($4.201m) |
$2.194m |
$3.529m |
$5.133m |
Geneva Finance S/H Equity EOFY (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% |
Noodles has suggested on the Geneva/Turners/Heartland story thread. that the published performance of Geneva is being 'massaged upwards' by the historical tax refunds being claimed. To get a better perspective on the current operational performance he suggested that I remove these 'tax refund injections', and impose income tax at the 28% rate that most companies pay. This I have done in the table below.
|
EOFY2012 |
EOFY2013 |
EOFY2014 |
EOFY2015 |
EOFY2016 |
EOFY2017 |
Geneva Finance NPAT {tax refunds removed and income tax imposed} (A) |
($1.577m) |
$0.091m |
($4.197m) |
$1.548m*0.72 |
$2.379m*0.72 |
$3.815m*0.72 |
Geneva Finance S/H Equity EOFY (B) |
$10.532m |
$12.368m |
$8.314m |
$16.064m |
$20.256m |
$24.862m |
Geneva Finance ROE (A)/(B) |
-15% |
+0.74% |
-50% |
+6.9% |
+8.6% |
+11.0% |
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 and FY2017 results?
SNOOPY
Is the profit growth story believable?
Here is what I said about the drivers of last years (FY2016) profits on the Geneva/Turners/Heartland 'story' thread:
-----
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.
------
The finance division was still far and away the greatest contributor to profits over FY2017. And the CEO, in AR2017, had this to say about it.
------
"The main driver of the profit increase was the growth in the receivables ledger, up 21% on last year. This driven by increasing lending volumes and in conjunction with the increase in contractual yields , control of asset quality and operating costs gave this trading entity a good result this year.
-------
There is that phrase again: 'control of asset quality'.
The provisioning rate has gone down from 41% (FY2015) to 35% (FY2016) and now to 32% (FY2017) of the total loan portfolio (before provisioning is deducted). That 3% improvement over FY2017 represents $2.839m in loan portfolio value. Given Geneva currently pay no tax, that 'change in provisioning' could flow straight through to the bottom line. Take that change in provisioning off the declared profit for FY2017:
$5.133m - $2.839m = $2.294m
That is less profit than last year. Shareholders must place a lot of faith in the fair valuation of loan book to believe the profit growth story.
SNOOPY