An Investment Story - Geneva/Turners/Heartland

[noodles]

	EOFY2012	EOFY2013	EOFY2014	EOFY2015	EOFY2016
Geneva Finance NPAT (A)	($1.577m)	$0.091m	($4.201m)	$2.194m	$3.529m
Geneva Finance S/H Equity (B)	$10.532m	$12.368m	$8.314m	$16.064m	$20.256m
Geneva Finance ROE (A)/(B)	-15%	+0.74%	-51%	+14%	+17%(*)

Snoopy,

Could it be that the FY16 Geneva ROE looks good because you are using the statutory NPAT number?
Perhaps you should normalize NPAT to remove tax credits and assume 28% tax. Only then could you possibly do a comparison.

[Beagle]

Roger, Do you by any chance still hold any Geneva residual shares for yesteryear , if so I would be very interested to hear you at this years AGM asking your well researched , in depth questions to the top table, this would give all shareholders a chance to judge for them selves just how much risk there is for all share holders ?

Sorry all our family shares were dumped immediately upon listing at an average of 13 cps, (years before the 7:1 share consolidation so equates to 91 cps now)...you might like to have a think about what the long term SP performance suggests about the companies business model. Repost of my 20 June 2016 post from the other thread titled "Be Very Careful Folks"

Be VERY careful folks, Some facts to consider
1. Many finance companies survived the GFC.
2.. First ranking debenture holders had to take 15% of their debenture value as shares at circa 35 cents per share, now worth a mere fraction of that.
3. Millions of dollars was invested in unsecured subordinated notes and these investors were forced to take close to half of the value of their investment in shares at circa 35 cps, now only worth a fraction of that so have taken a very serious haircut.
4. The company has an extremely chequered history and has made some very interesting calls on what loans are bad, doubtful and restructured in the past.
5. I know for a fact that they used to use the old cleanse the balance sheet just before balance date by selling a lot of horribly overdue loans into their side company Stellar Collection at full face value rather than taking an appropriate write-off on those loans as a means of artificially propping up the profitability / minimising losses to paint a far more rosy picture of their financial performance than what would otherwise have been the case.

I can't help wondering if they use the same old tricks to inappropriately avoid losses on bad / doubtful debts these days ? Does a leopard change its spots or a Tiger change its stripes ?.
I see David OConnell was in charge back then and still is. Hmmm

I put a LOT of stock on a companies track record in terms of assessing the credibility of management and the credibility of their "reported results". When looking at a companies track record I assess their entire track record not just the last year or two. Easy to manipulate one or two years financial results...anyone remember how Fay Richwhite manipulated the profit of Tranz Rail by doing grossly insufficient maintenance on the railway lines ?

Reported results for bank and finance companies involved a whole lot of subjective assessment of loans in terms of what's overdue, past due, doubtful and truly bad debt and Geveva finance's track record in this HIGHLY subjective process is something investors might like to consider.
Disc: Don't own, not to be considered professional advice or a recommendation, DYOR)

Bit of extra emphasis added. Questions you might like to ask ? How is it that their bad and doubtful debt provisioning rate has reduced so much in FY17 and if this hadn't changed they would have made a loss ? Could it be that the bank financing them would have been deeply unhappy about a loss ? What has changed in their business model that makes them believe across the full business cycle that their new considerably lower provisioning rate is adequate ? Questions for their auditors.
Is the former practice of selling doubtful receivables at full value to Stellar collections still continuing ? Why do you think this doesn't give a disingenuous view of Geneva Finance's profitability when the likely recovery rate could be far less than dollar for dollar ?

[Snoopy]

Snoopy,

Could it be that the FY16 Geneva ROE looks good because you are using the statutory NPAT number?
Perhaps you should normalize NPAT to remove tax credits and assume 28% tax. Only then could you possibly do a comparison.

I will go with your suggestion Noodles. Let's see what happens. I have removed the 'income tax credit effect' from the results for FY2015 and FY2016. (There was no income tax credited in the previous three years). So the table below gives an 'ongoing operational perspective' on the Geneva profit.

	EOFY2012	EOFY2013	EOFY2014	EOFY2015	EOFY2016
Geneva Finance NPAT (A)	($1.577m)	$0.091m	($4.197m)	$1.548m*0.72	$2.379m*0.72
Geneva Finance S/H Equity (B)	$10.532m	$12.368m	$8.314m	$16.064m	$20.256m
Geneva Finance ROE (A)/(B)	-15%	+0.74%	-50%	+6.9%	+8.6%

As you hinted at Noodles, 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 results? Since I valued Geneva (on the Geneva thread) on its dividend paying ability, I might argue that the declared profit perspective is still the better one to use.

SNOOPY

[Snoopy]

I have been busy extensively updating this thread with the 2017 data relating to our three finance company protagonists: Heartland Bank (HLB), Turners Automotive Group (TRA) and Geneva Finance (GFL). If you read the 'Chapters' in the thread again, you will see the changes. With more data available it is interesting to see further patterns emerging. All three can be thought of as finance companies, although it is more correct to say that TRA contains an in house finance operation that supplies most of the group profits.

Date: -->	30th September 2015	30th September 2016	30th September 2017	26th May 2018
Heartland Bank Share Price:	$1.12	$1.51 (+35%)	$1.80 (+19%)	$1.82
Turners Automotive Group Share Price:	$2.65	$3.08 (+16%)	$3.24 (+5.1%)	$2.92
Geneva Finance Limited Share Price:	$0.31	$0.41 (+32%)	$0.58 (+41%)	$0.62

Shareholders in both 'Heartland' and 'Geneva' had a good couple of years, measured at the period ending 30th September 2017. Both shares continued to rise in value after that date, with the prices retreating back towards those September 2017 levels at today's date. 'Turners' shareholders did not enjoy the same capital appreciation over this time period. I wondered if there was something in the large database that makes up this thread that could explain this?

Let's find out!

SNOOPY

[Snoopy]

I wondered if there was something in the large database that makes up this thread that could explain this?

Let's find out!

A comparison of historical PE ratios is a comparison of earnings expectations. On 30/09/2015 the expectations of Turners were clearly higher than Heartland and Geneva.

Date: -->	30th September 2015	30th September 2016	30th September 2017
Heartland Bank: Share Price /Historical PE:	$1.12 / 11.0	$1.51 / 13.5	$1.80 / 15.4
Turners Automotive Group: Share Price / Historical PE:	$2.65 / 19.9	$3.08 / 12.8	$3.24 / 14.9
Geneva Finance Limited: Share Price / Historical PE:	$0.31 / 7.1	$0.41 / 8.2	$0.58 / 7.5

The 30th September date is not far enough into the coming financial year for the half year result figure for any of the three companies to be released. The most current earnings season results, as reported to the market, are in the table below:

Time Period: -->	12m to Balance Date 2015	12m to Balance Date 2016	12m to Balance Date 2017
Heartland Bank Earnings:	10.1cps	11.2cps (+11%)	11.7cps (+4.5%)
Turners Automotive Group Earnings:	13.6cps	24.2cps (+77%)	21.7cps (-10.0%)
Geneva Finance Limited Earnings:	3.1cps	5.0cps (+61%)	7.3cps (+46%)

------

Notes

1/ Balance date for Heartland Bank is 30th June.
2/ Balance date for Geneva Finance Limited and Turners Automotive Group is 31st March
3/ Refer to 'Chapter 2' (in this thread) for normalised 'eps' figures .

------

Look forwards for one year to September 2016 and you will see that the Turners earnings increase (+77%) largely did reflect the PE expectations (PE = 19.9) from a year earlier. Yet surprisingly, the Geneva increase in earnings was almost as good over the same time period. So did Mr Market, with that relatively modest Geneva PE expectation of 8.2 in September 2015, preceding a 61% increase in profits over the next year, get it wrong?

Another explanation is that perhaps the market did not believe the profits stated by Geneva were credible. Yet one family of statistics can always be regarded as credible: those figures based on cash. As at 30th September 2016, the historic gross yield for Geneva was:

1.5c / 41c = 3.7%

Thus in dividend yield terms the historical yield for Geneva come September 2016 was still modest, something that may have provided a handbrake to Geneva share price appreciation over that one year period. That dividend in itself was the first in modern memory.

Historical 'earnings per share' are a future indicator of what level of dividends might be expected.

Cash offered to holding shareholders comes by way of the net dividend.

A share price is liable to react badly if the actual dividends (cash returns) do not meet expectations.

Date: -->	12m to 30th September 2015	12m to 30th September 2016	12m to 30th September 2017
Heartland Bank Dividend:	6.0cps	7.5cps (+25%)	8.5cps (+13%)
Turners Automotive Group Dividend:	7.2cps	12.36cps (+72%)	11.5cps (-7.0%)
Geneva Finance Limited Dividend:	none	1.5cps (+NM%)	2.0cps (+33%)

Dividends per share represent the actual cash return to shareholders.

SNOOPY

[Snoopy]

I have been busy extensively updating this thread with the 2017 data relating to our three finance company protagonists: Heartland Bank (HLB), Turners Automotive Group (TRA) and Geneva Finance (GFL). If you read the 'Chapters' in the thread again, you will see the changes. With more data available it is interesting to see further patterns emerging. All three can be thought of as finance companies, although it is more correct to say that TRA contains an in house finance operation that supplies most of the group profits.

Date: -->	30th September 2015	30th September 2016	30th September 2017	26th May 2018
Heartland Bank Share Price:	$1.12	$1.51 (+35%)	$1.80 (+19%)	$1.82
Turners Automotive Group Share Price:	$2.65	$3.08 (+16%)	$3.24 (+5.1%)	$2.92
Geneva Finance Limited Share Price:	$0.31	$0.41 (+32%)	$0.58 (+41%)	$0.62

Shareholders in both 'Heartland' and 'Geneva' had a good couple of years, measured at the period ending 30th September 2017. Both shares continued to rise in value after that date, with the prices retreating back towards those September 2017 levels at today's date. 'Turners' shareholders did not enjoy the same capital appreciation over this time period. I wondered if there was something in the large database that makes up this thread that could explain this?

Let's find out!

I have been busy extensively updating this thread with the 2018 data relating to our three finance company protagonists: Heartland Bank (HBL/HGH), Turners Automotive Group (TRA) and Geneva Finance (GFL). If you read the 'Chapters' in the thread again, you will see the changes. With more data available it is interesting to see further patterns emerging. All three can be thought of as finance companies, although it is more correct to say that TRA contains an in house finance operation that supplies most of the group profits.

Date: -->	30th September 2015	30th September 2016	30th September 2017	30th September 2018	19th November 2018
Heartland Bank Share Price:	$1.12	$1.51 (+35%)	$1.80 (+19%)	$1.73 (-3.9%)	$1.52
Turners Automotive Group Share Price:	$2.65	$3.08 (+16%)	$3.24 (+5.1%)	$2.95 (-9.0%)	$2.76
Geneva Finance Limited Share Price:	$0.31	$0.41 (+32%)	$0.55 (+34%)	$0.57 (+3.6%)	$0.53 (bid)

Only 'Geneva' had a positive twelve months, measured at the period ending 30th September 2018. All three protagonists have taken a similar percentage hit since 30th September 2018. All three have underperformed the index over the last September to September rolling twelve month period.

SNOOPY

[Snoopy]

Should be ‘perplexed’ about the current share price

Not making much of a return on its total invested capital (including debt). Some analysts might say not covering its cost of capital

That is one of my dislike with TRA, as far as I can see the cost of capital and the return on capital are both hovering around the 5 to 6%.

Excuse me for switching my comments on cost of capital from the 'main' Turners thread to this one.

'Cost of capital' has a particular meaning in financial analysis, being a weighted hybrid concoction of bank interest rates and share price volatility. But if we take the literal meaning, in the case of Turners 'the cost they must pay to the bank to borrow funds', this is now 4.5% to 5.5%. They have 'learned their lesson' about not constantly tapping shareholders for new funds.

If you look at Chapter 3 (post 6 in this thread) you can see that return on equity for Turners over FY2018 was 9.9% (excluding one offs). Yes it could be better, and it is bettered by HBL (10.2%) and GFL (22.7%). But it is still well above any practical cost of capital that TRA might seek. If you look at the finance division within TRA, then ROE jumps to 16.5%.

This year will see Turners focus on sorting out their in house growth rather than buying growth via acquisitions and that should further boost ROE. I don't see that Turners not achieving a return above their cost of capital.

SNOOPY

[Snoopy]

Bad debts did increase with poor non-recourse lending via MTF. This has been rectified by Turners tightening their non-recourse lending citeria,so the "bad loans" are running their course.I think maybe another 6 months or so will see the end of them.TRA are no longer dealing with some MTF originators.
Also adding to Turners margin, Turners are no longer putting about $4mil a month of Turners originated loans through MTF. They are putting them through their own Oxford Finance.

I have transferred my thoughts from the main Turners thread to this one, because this one contains the data to back up the point I want to make. If you look at Chapter 6 (post 11 on this thread), you will see that the 'Turners Finance' (Oxford Finance plus the old Turners Auction finance division added together) provision for impairment did go up in FY2018. In dollar terms it is by far the largest it has ever been. But the loan book has grown a lot in recent years. If you skip FY2017, the impaired loan position at EOFY2018 is actually the lowest it has been since TRA was incarnated in its current form, in percentage terms.
In my view the anomaly in all of this was FY2017, when the proportion of 'Provision for Impairment' to 'Total Loan Book' was abnormally low. The big jump in the impairment provision percentage at the end of FY2018 looks to me more like bringing provisioning back to more normal levels.

12-18 months is the impression I got from the annual meeting as to how long those problematic loans will affect the company.

In one sense I think Beagle is being optimistic. But there are two distinct steps in dealing with potentially bad loans:

1/ Make an 'impairment provision expense'. For FY2018, from the TRA income statement, this was $6.380m, a figure that raised eyebrows when only $2.026m was loaded into the impairment provision account in the previous year.
2/ Write off debts that are proven uncollectable. You have to go to note 14 in the TRA accounts to see what happened here. The sum of collective and specific write offs over FY2018 were:

$0.875m + $0.653m = $1.528m [ c.f. $1.539m + $0.054m = $1.593m over FY2017 ]

Overall there wasn't much difference 'year on year' in actual write offs.

Given the quantum of figures in point 2/, we can argue that the $4.354m jump in impaired asset provisioning, may take more than an incremental two years to 'work through the bad debt system' (I think this is the point Beagle was making). However, because all of these provisions are already in the system, I expect no further effect at all from the rag tag of doubtful debts on the MTF loans going forwards on Turners profits .

SNOOPY

[winner69]

Excuse me for switching my comments on cost of capital from the 'main' Turners thread to this one.

'Cost of capital' has a particular meaning in financial analysis, being a weighted hybrid concoction of bank interest rates and share price volatility. But if we take the literal meaning, in the case of Turners 'the cost they must pay to the bank to borrow funds', this is now 4.5% to 5.5%. They have 'learned their lesson' about not constantly tapping shareholders for new funds.

If you look at Chapter 3 (post 6 in this thread) you can see that return on equity for Turners over FY2018 was 9.9% (excluding one offs). Yes it could be better, and it is bettered by HBL (10.2%) and GFL (22.7%). But it is still well above any practical cost of capital that TRA might seek. If you look at the finance division within TRA, then ROE jumps to 16.5%.

This year will see Turners focus on sorting out their in house growth rather than buying growth via acquisitions and that should further boost ROE. I don't see any problem with Turners not achieving a return above their cost of capital.

SNOOPY

Snoops - Have you ever considered the returns Turners are making on total invested capital ....and not just on equity?

Might give you a fright if you consider debt and other borrowings.

[Snoopy]

Snoops - Have you ever considered the returns Turners are making on total invested capital ....and not just on equity?

Might give you a fright if you consider debt and other borrowings.

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%

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.

There is more than one way to interpret 'Return on Invested Capital'. But since Winner started this thread, I am going to use the 'Winner' definition.

Winner's formula is:

ROIC =[{A}+{B}+{C)]x{D}/[({EE}+{ES})/2 +({DE}+{DS})/2]

And what all those letters stand for can be referenced in the data table below.

	NPAT {A}	Tax Paid {B}	Interest Expense {C}	After Tax Multiplier {D}	S/h Equity EOFY {EE}	S/h Equity SOFY {ES}	Borrowings EOFY {DE}	Borrowings SOFY {DS}	ROIC
Geneva Finance
FY2019	$4.210m	$1.040m	$4.232m	(1-0.28)	$29.316m	$29.168m	$73.009m	$59.921m	7.1%
FY2018	$6.123m	($1.599m)	$3.584m	(1-0.28)	$29.168m	$24.862m	$59.921m	$54.077m	7.0%
FY2017	$5.133m	($1.318m)	$3.456m	(1-0.28)	$24.862m	$20.256m	$54.077m	$45.258m	7.3%
FY2016	$3.529m	($1.150m)	$3.372m	(1-0.28)	$20.256m	$16.064m	$45.258m	$33.882m	7.2%
FY2015	$2.194m	($0.646m)	$3.075m	(1-0.28)	$16.064m	$8.386m	$33.882m	$28.539m	7.7%
Turners Automotive Group
FY2018	$19.085m	$7.773m	$14.344m	(1-0.28)	$214.323m	$171.716m	$317.373m	$265.889m	6.1%
FY2017	$16.261m	$7.057m	$11.350m	(1-0.28)	$171.716m	$129.812m	$265.889m	$174.816m	6.7%
FY2016	$15.332m	$5.949m	$11.436m	(1-0.28)	$129.812m	$121.002m	$174.816m	$156.995m	8.1%
FY2015	$8.595m	$0.856m	$7.381m	(1-0.28)	$121.002m	$74.052m	$156.995m	$17.565m	6.6% (*)
Heartland
FY2019	$74.532m	$27.896m	$136.747m	(1-0.28)	$675.668m	$664.160m	$1,056.653m	$914.253m	10.4%
FY2018	$62.893m	$26.781m	$125.483m	(1-0.28)	$664.160m	$569.595m	$914.253m	$855.762m	10.3%
FY2017	$59.316m	$23.745m	$115.169m	(1-0.28)	$569.595m	$498.341m	$855.762m	$717.111m	10.8%
FY2016	$52.706m	$20.024m	$118.815m	(1-0.28)	$498.341m	$480.125m	$717.111m	$727.787m	11.4%
FY2015	$47.477m	$16.173m	$126.041m	(1-0.28)	$480.125m	$452.622m	$727.787m	$787.709m	11.2%

(*) means 'possibly not meaningful'

SNOOPY