An Investment Story - Geneva/Turners/Heartland

[winner69]

Sorry Snoops - i inadvertently deleted the post that deleted the thread

Could you repost the first 3 chapters

[Snow Leopard]

Once upon a time
there were three shares...



Ask the mods if they can undelete it.

[Snoopy]

Could you repost the first 3 chapters

Winner has suggested that I put my 'investment story' on a separate thread because it may be of interest to more than TNR (now TRA) shareholders. I would like to open with a preamble.

It is notoriously difficult to compare finance companies, because their operations tend to be different both in size and scope.

Turners Finance is largely a motor vehicle lender. But you cannot buy shares in Turners Finance. You can only by shares in Turners Limited (TNR, now renamed TRA), and that includes the adjunct 'Auctions & Fleet' (now renamed 'Automotive Retail') car and machinery sales buinesses. This means it is necessary to unpick the company of Turners structure in order to get valid comparisons.

Geneva (GFL) does a lot of lending on motor vehicles too, but also wider consumer finance (e.g. Hire Purchase deals). So Geneva is a yardstick for Turners, even if in total asset terms it is only one sixth the size.

Heartland (HBL, now renamed HGH) is perhaps New Zealand's most widely respected finance company, and deals with a much wider category set of receivables customers. However in asset terms, Heartland is nine times the size of TNR/TRA. If looking at the size differential in terms of finance assets only, it is nearer to twenty times the size of TNR/TRA. A major difference of Heartland today is that they take deposits from customers, whereas post GFC, Turners (the old Dorchester) and Geneva no longer do.

For those companies that are listed in NZ and regularly disclose detailed accounts I think the comparison of 'Heartland' vs 'Turners' and 'Turners' vs 'Geneva' is useful. Comparing 'Heartland' with 'Geneva' might be stretching things though! Probably the best thing to do with the numerical tables that follow is to see what makes sense in context, rather than think of them as some definitive guru solution!

SNOOPY

[Snoopy]

Over the last couple of years I have specialised in creating a lot of 'financial information' surrounding 'Turners'. However, although 'interesting' I have decided it is not that useful. The trouble is, a jumble of numbers on its own is just that, a jumble of numbers. What is needed is a cohesive thread to draw it all together, a 'story' if you like. Tell a story and suddenly the numbers have context and an overall meaning.

So here is the 'story' I intend to tell around TNR.

There are three characters in this story,

1/Geneva Finance (GFL),
2/Turners Limited (TNR, now TRA) and
3/ Heartland Limited (HBL, now HGH),

listed in terms of decreasing perceived risk. The characters are not equal. But they all operate in the New Zealand finance market. All at one stage took deposits from the public, but only HBL/HGH does this now. TNR is 'the one in the middle'.

The first statistic in this story is PE ratio (see Chapter 2). Investors need to know this, because they need to know how much Mr Market is currently prepared to pay for these companies' earnings. A company with more 'future potential' should command a higher PE ratio. Now, what might 'cause' a higher PE ratio?

ROE (return on shareholder equity) (see Chapter 3) is a measure of how efficiently a company can deliver earnings from a given resource of equity. The higher the ROE, the more efficiently the company is using its capital. Net Interest Margin (see Chapter 4a) is another measure of efficiency. But this applies only to financial entities, and that doesn't include the adjunct Turners Limited Auction and Fleet business. Net Profit Margin (see Chapter 4b) is a similar figure that applies to all companies, and takes into account the cost of doing business over and above the difference between borrowing and lending rates. A third measure of efficiency is the underlying gearing of the loan book. (see Chapter 5). Put simply, every finance company has an underlying shell, upon which is superimposed funds borrowed from a 'parent bank' (and/or depositor customers) and 'funds loaned' to borrowing customers as 'financial receivables'. With the underlying shell stripped out, investors can get a feel for how far the 'funds loaned' base is leveraged on the 'funds borrowed' base.

There are a couple of ways to present profits in an overexaggerated way:

1/The first is to underestimate the impaired asset position (see Chapter 6) . I look at the declared impaired asset position in relation to the total loan portfolio, including impaired assets, to get a feel for this. The 'impaired asset position' is a longer term reflective 'snapshot of state' that is modified every year by the Impaired Asset Expense (see Chapter 7) . The change in 'impaired asset expense' year on year is a measure of current year impairment effects.
2/ The second way is to borrow to the hilt against your capital base. My preferred indicator for this is MDRT or 'minimum debt repayment time' (see Chapter 8). This is a number that answers the question: If all profits were poured back in to repaying debt, how many years would it take to pay off that debt?

To summarize:

1/ P/E ratio measures 'market premium value'.

2/ 'ROE', 'Net Interest Margin' and 'Net Profit Margin' and 'Underlying Gearing of Loan Book' are three ways to measure why a higher than average P/E could be justified.

3/ 'Impaired Asset Position' and 'MDRT' are two measures to look at whether the accounts as presented are believable and long term sustainable.

With characters introduced, and the story outline told, it is time for the comparative battle to commence.

SNOOPY

[Snoopy]

To summarize:

1/ P/E ratio measures value.

Note that:

1/ The financial year (FY) ends on 31st March for Turners and Geneva, and 30th June for Heartland.
2/ Geneva results have been adjusted for the 06-07-2016 7:1 share consolidation.
3/ Turners results have been adjusted for the 22-03-2016 10:1 share consolidation.
4/ Turners results for FY2015 taxed at 28% (the future rate) for better YOY comparison.

	Normalised Profit	Shares on Issue	eps	Share Price	PE Ratio
Heartland FY2015	$48.163m-$0.588m- $0.098m=$47.477m	469.890m	10.1cps	$1.12	11.1
Heartland FY2016	$54.164m-$1.136m-$0.322m =$52.706m	476.469m	11.1cps	$1.51	13.7
Heartland FY2017	$60.808m-0.72x$1.2m-$0.628m =$59.316m	516.684m	11.5cps	$1.80	15.7
Heartland FY2018	$67.513m+0.72x$1.3m-($4.8m+$0.6m)-$0.156m =$62.893m	560.587m	11.2cps	$1.73	15.4
Heartland FY2019	$73.617m+ 0.72x($1.8m+$1.3m+$1.1m) -$1.936m -$0.173m =$74.532m	569.338m	13.1cps	$1.59	12.1
Turners FY2015	[$19.006m-($0.010+$7.058)m]x0.72=$8.595m	63.077m	13.6cps	$2.65	19.4
Turners FY2016	$15.602m-($0.200+$0.070)m=$15.332m	63.431m	24.2cps	$3.08	12.7
Turners FY2017	$17.574m-($1.229m+$0.084)m=$16.261m	74.524m	21.8cps	$3.24	14.9
Turners FY2018	$23.360m-($0.590+$0.820+$1.000)m-0.72x$2.664m =$19.085m	84.802m	22.5cps	$2.95	13.1
Geneva FY2015	$2.194m	70.435m	3.1cps	22c	7.1
Geneva FY2016	$3.529m	70.435m	5.0cps	41c	8.2
Geneva FY2017	$5.133m	70.435m	7.3cps	55c	7.5
Geneva FY2018	$6.123m	70.435m	8.7cps	57c	6.6
Geneva FY2019	$4.210m	72.935m	5.8cps	52c	9.0

Note:

1/ Heartland normalised profit removes gain from sale of investments and property plant and equipment.
1b/ In FY2017 I have removed a $1.2m insurance recovery write back.
1c/ In FY2018 I have added back a summed total of $1.3m in costs, representing from systems integration ($0.5m) and legacy system write offs ($0.3m) plus the costs so far spent on the proposed corporate restructure ($0.5m). I have removed the $0.6m profit on the sale of the bank invoice finance business and the $4.8m recovered from a legacy property loan from MARAC. I have removed $157k which represents a gain on sale of investments. However, I consider the additional provisioning for large relationship loans of $2.2m part of normal business operations and not a one off expense.
1d/ In FY2019 I have removed the $1.936m fair value movement of investment property gain, and the $173k gain on sale of investments.
2/ Turners normalised result removes revaluation gain on investments and gain on sale of PP&E, and the revaluation gain on the former TUA holding that was caused by the parent company's own bid to delist TUA (ref FY2015).
2b/ In FY2018 I have excluded the Turners "Fair value gain on contingent consideration" insurance contracts adjustments.
3/ Geneva becomes a net tax payer for the first time in FY2019.

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance (FY2015 perspective). Can such a premium be justified?

SNOOPY

[Snoopy]

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

	Normalised Profit (A)	Shareholder Funds SOFY	Shareholder Funds EOFY	Shareholder Funds (average) (B)	ROE (A/B)
Heartland FY2015	$47.477m	$452.622m	$480.125m	$466.374m	10.2%
Heartland FY2016	$52.706m	$480.125m	$498.341m	$489.233m	10.8%
Heartland FY2017	$59.316m	$498.341m	$569.595m	$533.968m	11.1%
Heartland FY2018	$62.893m	$569.595m	$664.160m	$616.878m	10.2%
Heartland FY2019	$74.532m	$664.160m	$675.668m	$669.914m	11.1%
Turners Limited FY2015	$8.595m	$74.052m	$121.002m	$97.527m	8.8%
Turners Limited FY2016	$15.332m	$121.002m	$129.812m	$125.007m	12.2%
Turners Automotive Group FY2017	$16.261m	$129.812m	$171.716m	$150.764m	10.8%
Turners Automotive Group FY2018	$19.085m	$171.716m	$214.323m	$193.012m	9.9%
Turners Automotive Group FY2019	$xx.xxxm	$214.323m	$226.374m	$220.349m	x.x%
Turners Finance FY2015	$4.604m	$38.44m	$57.82m	$48.13m	9.6%
Turners Finance FY2016	$8.691m	$57.82m	$63.87m	$60.85m	14.3%
Turners Finance FY2017	$9.019m	$63.869m	$54.431m	$59.150m	15.2%
Turners Finance FY2018	$10.564m	$54.431m	$74.018m	$62.224m	16.5%
Turners Finance FY2019	$9.097m	$74.018m	$72.205m	$73.112m	12.4%
Geneva FY2015	$2.194m	$8.386m	$16.054m	$12.220m	18.0%
Geneva FY2016	$3.529m	$16.054m	$20.256m	$18.155m	19.4%
Geneva FY2017	$5.133m	$20.256m	$24.862m	$22.559m	22.8%
Geneva FY2018	$6.123m	$24.862m	$29.168m	$27.015m	22.7%
Geneva FY2019	$4.210m	$29.168m	$29.396m	$29.282m	14.4%

SNOOPY

Note: Turners Finance results have been adjusted by reallocating 'interest revenue' and implied 'interest revenue profits' (see my post 1551 on the TRA thread) from the 'automotive retail' segment to the 'finance segment'. These finance figures do not include any contribution from the insurance or EC Credt business segments.

[Beagle]

One of there companies does not go with the others. Refer my posts in the Geneva thread. If you must compare them then based on their truly appalling track record of shareholder wealth destruction I think Geneva should trade on a PE of less than half the other two companies, (assuming you think Geneva have provided for bad and doubtful debts correctly and that they really are making a profit at all).

[Snoopy]

One of there companies does not go with the others. Refer my posts in the Geneva thread. If you must compare them then based on their truly appalling track record of shareholder wealth destruction I think Geneva should trade on a PE of less than half the other two companies, (assuming you think Geneva have provided for bad and doubtful debts correctly and that they really are making a profit at all).

Roger, these tables are based on current results and are what happens when I turn my calculator crank handle. Of course historical factors are not considered. This is not to say they shouldn't be as part of a wider picture. One table on its own does not give that wider picture. Bad and doubtful debts are another table entirely, and these will be considered in due course. I know that you, and many others, have documented your own far from positive experiences with Geneva. From a shareholders of todays perspective these experiences are gone, albeit not forgotten, and nor should they be forgotten. But that is not the point of the ROE table I am presenting. It is one block in an emerging picture, it doesn't contain historical baggage and nor should it. Please take everything in the context in which it is presented, without reading more or less into the picture than you should!

SNOOPY

[Snoopy]

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

	Interest Received (A)	Interest Expenses (B)	Cash Earning Assets SOFY	Cash Earning Assets EOFY	Cash Earning Assets (average) (C)	Net Interest Margin ( (A-B)/C )
Heartland Reporting Bank FY2015	$220.607m	$98.705m	$2,947.578m	$3,291.062m	$3,119.320m	3.91%
Heartland Bank FY2016	$265.475m	$118.815m	$3,291.062m	$3,413.423m	$3,352.234m	4.37%
Heartland Bank FY2017	$278.279m	$115.169m	$3,413..423m	$3,933.685m	$3,673.554m	4.43%
Heartland Bank FY2018	$309.284m	$125.483m	$3,933.685m	$4,397.350m	$4,160.518m	4.41%
Heartland Group Holdings FY2019	$334.330m	$136.747m	$4,397.350m	$4,774.769m	$4,586.060m	4.31%
Turners Finance FY2015	$24.278m	0.4895x $7.381m	$37.726m+$49.953m	$142.827m	$129.040m	16.0%
Turners Finance FY2016	$31.793m	0.5123x $11.436m	$142.827m	$167.598m	$155.213m	16.7%
Turners Finance FY2017	$34.471m	0.4122x $11.350m	$167.598m	$207.143m	$187.371m	15.9%
Turners Finance FY2018	$49.377m	0.5104x $14.344m	$207.143m	$289.799m	$248.471m	16.9%
Turners Finance FY2019	$52.579m	0.5650x $14.952m	$289.799m	$290.017m	$289.908m	15.2%
Geneva FY2015	$6.504m	$3.075m	$34.895m	$45.927m	$40.411m	8.50%
Geneva FY2016	$9.213m	$3.372m	$45.927m	$62.601m	$54.264m	10.6%
Geneva FY2017	$11.357m	$3.456m	$65.632m	$78.339m	$71.986m	11.0%
Geneva FY2018	$12.242m	$3.584m	$78.339m	$85.527m	$81.933m	10.6%
Geneva FY2019	$14.865m	$4.232m	$85.527m	$102.812m	$94.170m	11.3%

Notes:

1a/ 'Cash Earning Assets' for Heartland were calculated as follows:

Finance Receivables + Investments + Investment Properties + Non software Goodwill + Operating Lease Vehicles = Cash Earning Assets

2a/ 'Interest Received' from the Turners 'Finance segment' includes the interest received from the 'Automotive Retail' segment plus an apportionment of 'Corporate and Other' segment interest received. It does not include earnings from the 'insurance' and 'EC Credit' segments.

I note that the 'net interest margin' is extremely healthy for Turners Finance (FY2016 perspective), even compared to the 'more risky' Geneva Finance. The Heartland NIM is healthy in bank terms. But it compares poorly to the two comparative finance companies.

SNOOPY

[Snoopy]

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

	Liabilities (Shell) (A)	Assets (Shell) (B)	(A/B)	Liabilities (Finance) (C)	Assets (Finance) (D)	(C/D)	Total Liabilities (E)	Total Assets (F)	Overall Gearing (E/F)
Heartland Reporting Bank FY2015	$78.790m	$166.711m	47.3%	$2,346.977m	$2,636.277m	89.0%	$2,425.767m	$2,802.988m	86.5%
Heartland Bank FY2016	$48.853m	$133.758m	36.5%	$2,999.987m	$3,415.423m	87.8%	$3,048.840m	$3,547.181m	86.0%
Heartland Bank FY2017	$33.335m	$100.986m	33.0%	$3,429.741m	$3,933.685m	87.2%	$3,465.076m	$4,034.671m	85.9%
Heartland Bank FY2018	$35.708m	$98.576m	36,2%	$3,796.058m	$4,397.350m	86.3%	$3,831.766m	$4,495.926m	85.2%
Heartland Group Holdings FY2019	$40.402m	$151.635m	26.6%	$4,210.334m	$4,774.769m	88.2%	$4.250.736m	$4,926.404m	86.3%
Turners Finance FY2015	$15.121m	$16.801m	90%	$86.682m	$142.827m	60.7%
Turners Finance FY2016	$13.839m	$15.377m	90%	$105.268m	$167.598m	62.8%
Turners Finance FY2017	$5.342m	$5.935m	90%	$153.305m	$207.143m	74.0%
Turners Finance FY2018	$6.739m	$7.488m	90%	$216.531m	$289.799m	74.7%
Turners Finance FY2019	$21.523m	$23.914m	90%	$220.203m	$290.017m	75.9%
Turners Limited FY2015							$207.970m	$328.978m	63.2%
Turners Limited FY2016							$232.491m	$362.303m	64.2%
Turners Automotive Group FY2017							$384.917m	$556.633m	69.2%
Turners Automotive Group FY2018							$437.409m	$651.732m	67.1%
Turners Automotive Group FY2019							$427.808m	$654.182m	65.4%
Geneva FY2015	$8.065m	$8.959m	90%	$26.665m	$41.833m	63.7%	$34.728m	$50.792m	68.4%
Geneva FY2016	$13.547m	$15.052m	90%	$35.825m	$54.576m	65.6%	$49.372m	$69.628m	70.9%
Geneva FY2017	$18.090m	$20.100m	90%	$41.225m	$64.077m	64.3%	$59.315m	$84.177m	70.5%
Geneva FY2018	$28.491m	$31.657m	90%	$41.662m	$67.664m	61.6%	$70.153m	$99.321m	70.6%
Geneva FY2019	$32.648m	$36.275m	90%	$55.172m	$80.491m	68.5%	$87.820m	$117.216m	74.9%

As a much larger operation and a more diverse lender, Heartland's banking operation is -potentially- much more highly geared than the two smaller finance companies. The leverage of the loan book in Geneva and Turners may be understated because I have assumed that the underlying shell company that supports the loans is maximally stretched.

------

Looking at Turners vs Geneva (FY2016 perspective), there might to room to boost the Turners Lending gearing ratio by three to four percentage points. In practical terms, this means doing more lending without increasing the underlying bank loan that funds the business.

$362.303m x 0.68 = $246.366m
$246.366m -$232.491m = $13.875m

Assuming all of that extra revenue flows straight through to the bottom line, this translates to a latent hidden after tax profit boost of $13%[/.875m x 0.72 = $10.0m

------

So there is a broad hint as to why the PE ratio (FY2015 perspective) that Mr Market is prepared to pay for TNR is higher! Fast forward to an FY2017 perspective, and we can see that Turners is now working its balance sheet harder!

SNOOPY