GFL - Good news for Geneva Finance

[Major von Tempsky]

Hmmm, hum Snoopy, I wonder if you are up to date.

I seem to remember reading a relatively recent statement that the "heritage loans" have largely been repaid or written off so that division of GFL is now looking for new loan books to bid for and realise.

[Snoopy]

Hmmm, hum Snoopy, I wonder if you are up to date.

I seem to remember reading a relatively recent statement that the "heritage loans" have largely been repaid or written off so that division of GFL is now looking for new loan books to bid for and realise.

You are the one with 'skin in the game' Major. I just look at the accounts occasionally. So I am happy to be corrected if you have greater insight.

No quite sure what you mean by "Heritage loans". I see in the 'segmented results' under note 39 in the annual report there is a section titled "Old Business." The assets of this segment over the last three years, and the accompanying 'impaired asset expense for the equivalent year go like this:

Year	Segment Assets	Impaired Asset Expense
2015	$6.670m	$1.474m
2016	$8.968m	$1.463m
2017	$9.966m	$1.046m

This shows that:
1/ the actual 'old loan' asset balance is increasing, not decreasing from FY2015 to FY2017.
2/ Yet the loan balance is increasing even as the impaired loan expense on old loans continues to occur each year!

At first glance the juxtaposition between 1/ and 2/ doesn't make sense. Perhaps you can explain Major?

SNOOPY

[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

[whatsup]

Snoopy and Major why don't you ask that question at tomorrows AGM ?

[Snoopy]

Snoopy and Major why don't you ask that question at tomorrows AGM ?

I live in the wrong island for the AGM Whatsup. Although probably the fact that I am not a Geneva shareholder means that I wouldn't be invited anyway ;-p

Will happily hear your summary of the AGM tomorrow though!

SNOOPY

[Snoopy]

Hmmm, hum Snoopy, I wonder if you are up to date.

I seem to remember reading a relatively recent statement that the "heritage loans" have largely been repaid or written off so that division of GFL is now looking for new loan books to bid for and realise.

I woke up this morning Major, and the 'night gnome' had whispered into my unconsciousness that I hadn't answered your question properly! Some companies who have gone through a troublesome period 'ring fence' their bad history, and redirect their efforts to their current and future business strategy. I see that under Note 39a:

1/ 'New Business' is defined as the lending of money to individuals , companies and other entities under a securitized receivables arrangement with Westpac.
2/ 'Old Business' is defined as the management of money to individuals , companies and other entities on loans issued (by inference prior to the securitization arrangement with Westpac), plus the wrap up from any of those loans due from the debt collection agency.

Apart from the fact that the 'New Business' is actively chasing 'new business' while the 'Old business' is not, I can't see any difference between the fundamental basis of the 'Old business' and the 'New business'. Furthermore both the 'New business' and 'Old business' both rank in the segmented analysis as 'Current Business Units'.

The 'Old business' description refers to 'external debt collection'. But I don't know if that means:

1/ Geneva has outsourced the collection of unpaid debts from recalcitrant customers OR
2/ Geneva has bought overdue loans from third party lenders that it is now attempting to recover.

If it is the latter,there is no mention of such activity continuing in the future under 'New Business'. Consequently I don't know where your suggestion that Geneva is "looking for new loan books to bid for and realise" comes from.

SNOOPY

[Snoopy]

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

[Snoopy]

Here is what I said about the drivers of last years (FY2016) profits on the Geneva/Turners/Heartland 'story' thread:

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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.

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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

[whatsup]

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 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.

-------

Snoops, If you were able to have gone to the meeting today you could have asked searching questions and discovered that you have been barking up the wrong tree, their business is 80% into the car market plus car service and insurance and that 18% of that market is to "gold" status borrowers , 70+% to "silver and only approx 8% to "bronze" status. Their margin is up to 18% gross on the bronze and smaller on the gold customers.
While not give anything away they are expecting another very good year and so far everything is on track to deliver that.

[Snoopy]

Snoops, If you were able to have gone to the meeting today you could have asked searching questions and discovered that you have been barking up the wrong tree, their business is 80% into the car market plus car service and insurance and that 18% of that market is to "gold" status borrowers , 70+% to "silver and only approx 8% to "bronze" status. Their margin is up to 18% gross on the bronze and smaller on the gold customers.
While not give anything away they are expecting another very good year and so far everything is on track to deliver that.

Appreciate the extra insight 'Whatsup'. I just brought up the Annual Report for 2017, and couldn't see the car market even mentioned in it! But obviously this makes Geneva a better measuring stick to compare against the finance arm of 'Turners Automotive', who like Geneva do insurance.

I am curious about these 'gold', 'silver' and 'bronze' customers. Just what do these terms really mean? Does Valerie Adams qualify as a 'silver customer' for her 2016 Olympic effort for example?

SNOOPY