GFL - Good news for Geneva Finance

[whatsup]

This stock officially has jack all liquidity

Very tightly held for a reason, its a 3 year plan imo.

[whatsup]

60 cents...well well. Considering the 7:1 share consolidation that's a whopping 8.57 cents of shareholder value for shares issued at the time of the moratorium 9 years ago at what Directors assured shareholders was fair value then 36.49 cps. What a "fantastic" long term investment this company has been. Nine years on with very little in the way of a dividend for nearly a decade original beleaguered investors given a "hobson's choice" of shares or liquidation could now cash in if there was sufficient liquidity and get a "whopping" 23.5 cents in the dollar back on shares they were assured by some of the former directors still in office were issued at fair value in 2008.
What a truly "stellar" investment opportunity this company has proved to be. The "integrity" of the original valuation of those shares in 2008 and the veracity of their business model should be crystal clear for all to see but if you need any help consider this, how much has the NZX50 increased in value since 2008 ?

Beag, I couldn't disagree with you but all shareholders had a chance to load up with the cash issue of a couple of years ago and then apply for more, I did and so far haven't regretted it , Im now a top 10 s her.

[whatsup]

all time high today and with the upcoming AGM there could be more " good news " .

[Major von Tempsky]

Yeehar! I'm holding tightly. Glad I don't have any Fletcher :-)

[Sgt Pepper]

Yeehar! I'm holding tightly. Glad I don't have any Fletcher :-)

Glad I didn't accept the unsolicited offer received through the mail 3 months ago to take my GFL shares off my hands for 40cps!

[Snoopy]

Shareholder Equity	$20.256m
less Intangibles	$0.180m
less Deferred tax	$1.796m
Total Available Asset Base	$18.280m

Financial Assets at fair value thru P&L	$0.630m
plus Financial Receivables	$54.575m
plus Other Receivables & Deferred Expenses	$0.15m + $1.082m
Total Receivables	$56.437m

So check :

Total Available Asset Base > 0.2x (Total Receivables)

=> $18.280m > 0.2 x $56.437m = $11.287m (true)

=> Geneva passes the Available Equity to Receivable Loan book test.

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

[Snoopy]

Current Financial Assets		Reference
Cash & Cash Equivalents	$8.025m	Balance Sheet FY2016
Financial Assets at fair value thru P&L	$0.630m	Balance Sheet FY2016
Financial Receivables 0-12 months (contractual)	$19.934m	Note 16
Total Current (contractual)	$28.529m	(addition)
Current Financial Liabilities		Reference
Total Current (contractual)	$20.023m	Note 30
Other Cash Source		Reference
Borrowing Headroom	$2.946m	Note 19

Now we can use the above information for the liquidity buffer test:

($28.589m + $2.946m) = $31.535m > 1.1 x $20.023m = $22.025m (true)

=> Geneva passes the liquidity buffer ratio test

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

[Snoopy]

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

= ($2.739m + $3.372m)/ $3.372m = 1.81 > 1.2 (test standard)

=> Geneva passes the EBIT to interest expense test.

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

[Snoopy]

After some thought, I think I have been looking at this issue of gearing from the wrong angle.

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	$15.052m (2)	-	$13.547m (3)	=	$1.505m (5)
Underlying Finance	$54.576m (1)	-	$35.825m (4)	=	$18.751m (5)
Balance Sheet Total	$69.628m (1)	-	$49.372m (1)	=	$20.256m (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 = $15.052m x 0.9 = $13.547m (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
= (At Risk Liabilities)/(At Risk Assets)
= $35.825m/$54.576m
= 65.6%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities?

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

[Snoopy]

	EOFY2016	EOFY2015	Average
Cash/Cash Equivalents	$8.025m	$4.094m	$6.060m
Investment Property Income	$3.031m	$2.718m	$2.875m
Finance Receivables	$54.576mm	$41.833m	$48.205m
Total			$57.139m

Interest Margin = [(Interest Received) - (Interest Expenses)] / [Average Cash Earning assets for Year]
= [$9.312m -$3.372m] / $57.139m
= 10.9%

It is interesting to compare that figure with that of Heartland that increased to 4.4% for FY2015 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.

	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