Buffett Test 1/ FY2016: Top Three Position in Chosen Operating Markets
Quote:
Originally Posted by
Snoopy
So I have decided to build on your thread instead of the old one.
I aim to assess whether the 'Westpac Group' is a suitable candidate to which to apply the (Mary) 'Buffett' growth model .
WBC, incorporated in Australia, but also listed on the NZX describes their operation of their business in the FY2015 Annual Report as follows:
"to be one of the world's great service companies helping our customers, communities and people to prosper and grow"
It would be an oversimlification to think of Westpac just as a traditional bank. They have a strong wealth and insurance business through associated company BT Group, in which they sold down their controlling stake in FY2015. The business is based around strong Australian and New Zealand geographic foundations. The New Zealand business is a self contained unit.
The business objectives are to support:
1/ Australian and New Zealand consumers.
2/ Australian and New Zealand businesses, both large and small
2/ Regional Trade and Capital Flows for business customers via the WIB ("Westpac Institutional Banking Division".)
3/ A 'digital ready infrastructure' for the future.
Major Competitors in this sector are listed in order by $A revenue (interest income).
1/ Commonwealth Bank of Australia: $33,817m
2/ Westpac Bank: $31,822m
3/ ANZ Bank: $29.951m
4/ National Australia Bank $27,629m
Conclusion: As number two in the market, WBC passes the first Buffett Point test.
SNOOPY
A profit picture (FY2016 perspective)
Quote:
Originally Posted by
macduffy
A few reservations as to whether maintaining the dividend will prove to be sustainable. But that's for the future!
Bank results tend to be horribly complex if you drill down into them. Fortunately for potential shareholders, Westpac release a 'statutory result' and a 'cash result'. The 'cash result' is of great interest to shareholders because dividends tend to be paid from cash available. Plus all of those horrible normalizing corrections are done for you! But some investors are interested in a true 'normalized profit' result. To calculate this, there are at least a couple of corrections you need to make to the 'cash result' (or a whole heap more corrections to the statutory result). My take on the 'normalized result' is in the table below. (Note all dollar figures quoted are Australian dollars.)
Westpac Group (WBC) |
FY2016 |
FY2015 |
FY2014 |
FY2013 |
FY2012 |
Cash Profit |
$7,822m |
$7,820m |
$7,628m |
$7,063m |
$6,564m |
add back after tax Expense effect of buying J O Hambro Capital Management |
|
|
|
|
0.7x$38m |
less Amortization & Impairment of Intangible Assets and Deferred Expenditure |
$216m |
$221m |
$222m |
$224m |
$231m |
less after tax Net gain on disposal of Assets |
0.7x$1m |
0.7x$103m |
0.7x$97m |
0.7x$67m |
0.7x$46m |
equals Normalized Profit |
$7,605m |
$7,527m |
$7,338m |
$6,792m |
$6,328m |
The annual reports (under Group Segment Information) contains notes on why those adjustments to produce the 'cash result' were made.
Adjustment 1
-----
An historic merger with St.George and the acquisitions of J O Hambro Capital Management (JOHCM) and Lloyds Australia resulted in the recognition of identifiable intangible assets. These assets include intangibles related to core deposits, customer relationships, management contracts and distribution relationships. These intangible items are amortised over their useful lives, ranging between four and twenty years. The amortisation of intangible assets (excluding capitalised software) is a cash earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders.
Costs (spread over several years) associated with the acquisition of Lloyds have been treated as a cash earnings adjustment as they do not impact the earnings expected from the acquired businesses following the integration period.
-----
Put in this light, the adjustments to Statutory Profit are logical. However, it is equally true to say that the intangibles related to the finite lives of core deposits, customer relationships, management contracts and distribution relationships are recognised by Westpac management. And all the money paid for those 'eroding intangibles' by Westpac management was 'real cash' not so long ago. Therefore I contend that these 'amortised intangible' figures should be removed from the cash profit to get a normalised profit picture.
Adjustment 2
It is undisputed that selling an asset generates real cash. However, once sold an asset cannot be sold again. I therefore contend that asset sales should be removed from the cash result to create a normalised operating result.
SNOOPY
Buffett Test 2/ FY2016: Rising eps Trend (one setback allowed)
Quote:
Originally Posted by
Snoopy
WBC passes the first Buffett Point test.
Westpac Group (WBC) |
FY2016 |
FY2015 |
FY2014 |
FY2013 |
FY2012 |
Normalized Profit {A} |
$7,605m |
$7,527m |
$7,338m |
$6,792m |
$6,328m |
Shares on Issue EOFY {B} |
3,313m |
3,140m |
3,114m |
3,087m |
3,043m |
Earnings Per Share {A}/{B} |
$2.30 |
$2.40 |
$2.36 |
$2.20 |
$2.08 |
A lower year on year result in FY2016 is not enough to obscure a longer term trend.
Conclusion: Pass Test
SNOOPY