An Investment Story - Geneva/Turners/Heartland

[Snoopy]

What would happen if all profits were directed to paying off a company's debt? How long would that take? The answer to this question, in years, is the 'Minimum Debt Repayment Time' (MDRT).

Throughout this thread (so far) I have taken the view that 'operational performance' is the most important thing. However when it comes to paying back debt what matters most is the 'declared profit'. This is because all 'cash in', including that form one off assets sales (for example) is equally good when it comes to applying that cash to repay debt.

Sometimes 'declared after tax profit' contains non cashflow items. One such item is the provisioning for impaired assets. A company would not impair assets if it did not believe that some impairment was necessary. Nevertheless, in the short term, this extra cashflow could be used to repay debt at a pinch. So I have added back in the impaired asset provision to after tax profit. This 'adjusted profit' is an estimate of the finance company's ability to repay debt in the current year if all resources were called upon.

When evaluating a finance company's debt, I am considering the 'net debt' position. That means I take the company's debt obligations and subtract that from the cash on hand.

	Minimum Debt Repayment Time (MDRT) {years}
Heartland Bank FY2015	12.1
Heartland Bank FY2016	9.9
Heartland Bank FY2017	11.2
Heartland Bank FY2018	10.4
Heartland Group Holdings FY2019	11.0
Turners Limited FY2015	7.4
Turners Limited FY2016	9.8
Turners Automotive Group FY2017	10.3
Turners Automotive Group FY2018	10.5
Turners Automotive Group FY2019	9.5
Geneva FY2015	17.7
Geneva FY2016	11.1
Geneva FY2017	8.0
Geneva FY2018	7.1
Geneva FY2019	10.1

The three companies showed a wide divergence in this statistic in FY2015. Yet, come FY2016, they have all converged towards the 10 to 11 figure. From a MDRT risk perspective this means there is little to choose between these three protagonists.

SNOOPY

P.S. Sample calculations for FY2016 (and others) are below:

MDRT Heartland FY2016

[(Subordinated Bond) + (Parent Bank Borrowings) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($3.378m+ $429.034m + $284.429m) - $84.154m] / [ $54.164n + 0.72($13.501m) ] = 9.9 years

MDRT Heartland FY2017

[(Subordinated Bond) + (Subordinated Notes) + (Parent Bank Borrowings) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($3.378m+ $21.180m + $616.838m + $214.365m) - $57.040m] / [ $60.808m + 0.72($15.015m) ] = 11.2 years

MDRT Heartland FY2018

[(Subordinated Bond) + (Subordinated Notes) + (Unsubordinated Notes) + (Parent Bank Borrowings) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($3.378m+ $22.172m + $151.853 + $689.346m + $47.504m) - $49.588m] / [ $67.513m + 0.72($22.067m) ] = 10.4 years

MDRT Heartland FY2019

[(Unsubordinated Notes) + (Parent Bank Borrowings) + (Certificate of Deposit) + (Securitized borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($337.680m + $25.002m + $34.836m + $659.135m) - $80.584m] / [ $73.617m + 0.72($20.676m) ] = 11.0 years



MDRT Turners Limited FY2016

[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($109.327m+ $42.300m + $23.189m) - $13.810m] / [ $15.602n + 0.72($1.041m) ] = 9.8 years


MDRT Turners Automotive Group FY2017

[(Parent Bank Borrowings) + (MTA Borrowings) + (TRAHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $17.574m + 0.72x $2.206m] = 10.3 years

MDRT Turners Automotive Group FY2018

[(Parent Bank Borrowings) + (MTA Borrowings) + (Vendor Property Funding)+ (TRAHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($230.712m+ $58.603m + $2.837m + $25.474m) - $25.145m] / [ $23.360m + 0.72 x $6.380m ] = 10.5 years

MDRT Turners Automotive Group FY2019

[(Parent Bank Borrowings) + (MTA Borrowings) + (TRA100 bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($251.177m+ $37.055m + $24.631m) - $15.866m] / [ $22.719m + 0.72 x($7.892m +$4.200)] = 9.5 years



MDRT Geneva Finance Limited FY2016

[((Parent Bank Borrowings) + (Unsecured Borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($40.408m+ $4.850m) - $8.025m] / [ $3.529m - 0.72($0.234m) ] = 11.1 years

MDRT Geneva Finance Limited FY2018

[((Parent Bank Borrowings) + (Unsecured Borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($51.971m+ $7.950m) - $14.473m] / [ $6.123m + 0.72($0.363m) ] = 7.1 years

MDRT Geneva Finance Limited FY2019

[((Parent Bank Borrowings) + (Unsecured Borrowings)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($59.691m+ $13.318m) - $18.253m] / [ $4.210m + 0.72($1.697m) ] = 10.1 years

[Snoopy]

	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.

It is interesting to compare the above post comparing 'net interest margins' with the 'net profit margin' below.

	Normalised Profit (A)	Gross Revenue (B)	Net Profit Margin (A/B)
Heartland Bank FY2015	$47.477m	$260.458m	18.2%
Heartland Bank FY2016	$52.706m	$265.475m	19.8%
Heartland Bank FY2017	$59.316m	$278.279m	21.3%
Heartland Bank FY2018	$62.893m	$309.284m	20.3%
Heartland Group Holdings FY2019	$74.532m	$334.330m	22.3%
Turners Limited FY2015	$8.595m	$90.195m	9.5%
Turners Limited FY2016	$15.332m	$171.195m	9.0%
Turners Automotive Group FY2017	$16.261m	$249.338m	6.5%
Turners Automotive Group FY2018	$19.085m	$325.047m	5.9%
Turners Automotive Group FY2019	$xx.xxxm	$328.258m	x.x%
Turners Finance Division FY2015	$6.394m x 0.72	$19.512m+$2.781m+$1.985m= $24.278m	19.0%
Turners Finance Division FY2016	$12.071m x 0.72	$24.415m+$7.261m+$0.017m= $31.793m	27.3%
Turners Finance Division FY2017	$12.527m x 0.72	$26.818m+$7.590m+$0.063m= $34.471m	26.2%
Turners Finance Division FY2018	$14.672m x 0.72	$39.747m+$9.311m+$0.279m= $49.336m	21.4%
Turners Finance Division FY2019	$12.635m x 0.72	$44.193m+$8.383m+$0.003m= $52.579m	17.3%
Geneva FY2015	$2.194m	$6.504m+$1.457m+$1.956m= $9.917m	22.1%
Geneva FY2016	$3.529m	$9.213m+$1.342m+$1.675m= $12.330m	28.9%
Geneva FY2017	$5.133m	$11.357m+$2.469m+$1.593m= $15.419m	33.3%
Geneva FY2018	$6.123m	$12.242m+$4.126m+$2.624m= $18.992m	32.3%
Geneva FY2019	$4.210m	$14.865m+$7.383m+$5.696m= $27.944m	15.1%

Note the distinction that I have drawn between 'Turners Limited' (the listed vehicle that shareholders can invest in, in FY2017 renamed 'Turners Automotive Group') and 'Turners Finance' (the finance division of 'Turners Limited'/'Turners Automotive Group'). (added: 01-09-2017: Profits of 'Turner Finance' segment amended to include the referred finance business of the 'Turners Automotive' segment.)

(*) The gross revenue for "Turners Finance' is comprised of the declared revenue for 'Finance' plus the 'Interest Revenue' for 'Automotive Retail' plus an adjustment representing an appropriate proportion of 'Corporate and Other' interest revenue.

SNOOPY

[Snoopy]

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) and
3/ Heartland Limited (HBL),

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 does this now. TNR is 'the one in the middle'.

The first statistic in this story is PE ratio. 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.

Back on 15th August 2016, the respective historical PE ratios were 13.5 (Heartland), 12.8 (Turners) and 9.6 (Geneva).

a/ Heartland are forecasting a $57m-$60m NPAT for FY2017, +8-15% on the FY2016 result. Heartland currently have 516.2m shares on issue, up from 476.4m at EOFY2016. This 8.4% increase in shares was largely from a capital raising that was not well signalled. In fact some shareholders were expecting a capital return. I don't think any significant new share issue was factored into shareholders expectations back in 15th August 2016.
b/ Turners are forecasting NPAT of $17.3m-$17.6m, +13-15% on the FY2016 result. Note that the number of shares on issue have gone from 63.5m at reporting date to 74.5m today, an increase of 17%. The new shares being issued, largely from conversion of TNRHA bonds, was a well signalled event. So you could argue that those investors in FY2016 'looking forwards' expected a lower 'eps growth' than 'headline profit growth'. 'eps growth' based on projected profit growth for FY2017 taking into account the new shares on issue was -8% to +6%.
c/ Geneva are claiming a $5.1m NPAT, +45% on the FY2016 result. There was a small placement of shares made during the year. But $0.380m on total share capital of $20.256m (2% 0f the total) I would judge as not significant for forecasting 'eps' error purposes.

If we look back on those August 2016 PEs now, we can see that the company with the highest PE ratio at the time (Heartland) achieved a lower growth rate for FY2017 than the company with the lowest PE (Geneva). However, Heartland is the only one of the three with a real track record, and the loans tended to be higher quality. So I guess the market is prepared to pay more for getting behind loans with a lower risk of default.

Geneva looks to have been the stand out performer in terms of prior expectations. A PE of 9.6 in no way reflects the 45% gain in profit in the ensuing year that was achieved.

Turners had the worst 'eps' growth. And I think it is fair to say that Turners had the most 'unsignalled' developments since August 2016

1/ Launches new convertible bond offer.
2/ Signed exclusive loan partnership with MTF
3/ Acquired 'Autosure' insurance business.
4/ Launched 'Cartopia' web only sales channel.
5/ Established securitisation program for loans.

In a 'group of three' it looks like Turners are moving the slowest. But the Turners growth strategy, in general, was well articulated. So the fact that shareholders were prepared to pay a high price in PE terms for this mid-cap share (PE of 12.8) back in August was maybe not a surprise. The historical PE for Turners with reference to 2016 results, in 'eps' terms, is now 17. Turners will have to perform very well from here to justify this high PE rating.

SNOOPY

[JoeGrogan]

Back on 15th August 2016, the respective historical PE ratios were 13.5 (Heartland), 12.8 (Turners) and 9.6 (Geneva).

a/ Heartland are forecasting a $57m-$60m NPAT for FY2017, +8-15% on the FY2016 result. Heartland currently have 516.2m shares on issue up from 476.4m. This 8.4% increase in shares was largely from a capital raising that was not well signalled. In fact some shareholders were expecting a capital return. I don't think any significant new share issue was factored into shareholders expectations back in 15th August 2016.
b/ Turners are forecasting $24m-$24.5m, +60% on the FY2016 result. Note that the number of shares on issue have gone from 63.5m at reporting date to 74.5m today, an increase of 17%. The new shares issued, largely from conversion of TNRHA bonds, was a well signalled event. So you could argue that those investors in FY2016 'looking forwards' expected a lower 'eps growth' than 'headline profit growth'. 'eps growth' was +51% (still a good result)
c/ Geneva are claiming a $5.1m NPAT, +45% on the FY2016 result. There was a small placement of shares made during the year. But $0.380m on total share capital of $20.256m (2% 0f the total) I woudl judge as not significant for forecasting 'eps' error purposes.

If we look back on those August 2016 PEs now, we can that the company with the highest PE ratio at the time (Heartland) achieved the lowest growth for FY2017. However, Heartland was the only one of the three with a real track record, and the loans tended to be higher quality. So I guess the market is prepared to pay more for getting behind loans with a lower risk of default.

SNOOPY

The Turners forecast of $24-24.5m is profit before tax not NPAT. Last year NPBT was $21.5m, so NPAT this year is likely to be around $18-$21 million.

[Beagle]

Management know they are in a high risk area of the loan market. They know many of their loans will be unrecoverable in an economic downturn. So they are being extremely prudent in their approach to the loan book. Evidence of extremely good planning and foresight?

You are far wider of the mark than you have been on the HBL thread.
Have look at their long term track record. Let me correct your post. Management know they are in the extreme risk area of the loan market often unsecured lending to people who can't get finance from a mainstream lender at a fairer rate. Management know that a substantial number of their loans would be irrecoverable in another economic downturn and if it weren't for the fact that they now obtain their funding from a proper bank they would have to enter another moratorium. Management also know their credibility with the investing public in terms of debenture securities is shot for all time because they have destroyed so many millions of deposit holders money. Management have no idea whatsoever how to model delinquencies in an economic downturn, in fact they only make a profit in good economic times by under provisioning for bad and doubtful debts across the economic cycle. There is nothing prudent about how this company has been run. Their long term performance has been absolutely appalling. A new generation of gullible investors is currently being taken for a ride. The business model simply does not work across the business cycle.
Every Tom Dick and Harry simply walks away from their debt obligation when the custard hits the fan. You really are wasting your time comparing an apple to an orange and a rotten tomato.

[Snoopy]

The Turners forecast of $24-24.5m is profit before tax not NPAT. Last year NPBT was $21.5m, so NPAT this year is likely to be around $18-$21 million.

Thanks for picking up the error Joe. I assume a forward tax rate of 28%. So based on Turners NPBT forecast, I would rate the NPAT forecast for Turners over FY2017 to be:

(1-0.28) x ($24m to $24.5m) = $17.3m to $17.5m

I have corrected my post accordingly.

SNOOPY

[Snoopy]

You are far wider of the mark than you have been on the HBL thread.
Have look at their long term track record. Let me correct your post. Management know they are in the extreme risk area of the loan market often unsecured lending to people who can't get finance from a mainstream lender at a fairer rate.

Roger, can you not make the same argument all the way down the line?

A farmer would be best to finance their new truck by borrowing from the ANZ against their land. But if they are financially stretched, then Heartland would loan them the money at a higher rate. If Heartland say no, then Turners could step up to the plate. And if Turners say no, there is always Geneva.

If you say Geneva is immoral with their lending policy, then how do you rate Turners? There are people out there who have had their cars financed by Turners repossessed. And what about those farmers being charged a much higher loan rate by Heartland than farmer Joe down the road who has got a lower priced loan from ANZ? Are the managers at Heartland immoral too? Or are all lenders 'moral' until the truck gets repsssessed and sold? And at that point, all lenders become scum?

Management also know their credibility with the investing public in terms of debenture securities is shot for all time because they have destroyed so many millions of deposit holders money.

All this is in the open. No more debenture funding from the public is being sought. Of course I have sympathy for those past debenture holders who thought they were putting money in a 'solid as' company that subsequently defaulted. But this is now an historical event, and the fall out is in the public arena as a warning to potential future investors. At some point, those historic debenture holders have to move on.

Management know that a substantial number of their loans would be irrecoverable in another economic downturn and if it weren't for the fact that they now obtain their funding from a proper bank they would have to enter another moratorium. Management also know their credibility with the investing public in terms of debenture securities is shot for all time because they have destroyed so many millions of deposit holders money. Management have no idea whatsoever how to model delinquencies in an economic downturn, in fact they only make a profit in good economic times by under provisioning for bad and doubtful debts across the economic cycle. There is nothing prudent about how this company has been run. Their long term performance has been absolutely appalling. A new generation of gullible investors is currently being taken for a ride. The business model simply does not work across the business cycle.

	Provision for Impairment (A)	'Net Receivables' + 'Provision for Impairment' (B)	(A/B)
Geneva FY2015	$29.631m	$71.464m	41%
Geneva FY2016	$29.448m	$84.024m	35%

I must admit the provisioning is startling. To assume that 35% of your loan book won't be coming back is rather astonishing. Yet all this is disclosed to the banks and shareholders that now fund Geneva. And they must think it is OK! What level of provisioning do you think Geneva should use, given the future outlook?

Every Tom Dick and Harry simply walks away from their debt obligation when the custard hits the fan. You really are wasting your time comparing an apple to an orange and a rotten tomato.

Perhaps I am not wasting my time if I contrast them?

SNOOPY

[Beagle]

50% Snoopy. Its a 50/50 chance when you make unsecured loans as a fifth tier lender to people who are seeking loans as a lender of almost last resort.
It is most interesting that they dropped their provisioning rate from 41% to 35%. This is how they managed to turn a profit. Pray tell, what basis is there behind such a startling drop to believe this is appropriate across the business cycle ? Note: Their historical provisioning models have quite obviously proven to be insufficient. Are we to believe its different this time ? Yeah right, hand me a Tui...

[Major von Tempsky]

In the Global Financial Crisis about 50 of NZ's finance companies went bankrupt (practically the entire sector) or entered into arrangements to substantially default. The reason was that the people they lent to refused to repay them so they had no option. They were at that time mostly funded by public debentures which had terms around 5 years so that when the term was up the finance companies couldn't repay nor could they reborrow from the public.

However for some obscure reason Roger is totally fixated on just Geneva to the point that one begins to wonder whether he is coming unhinged.
It would be interesting to know whether Roger pursues the other 49 in his vendetta as well....

Presumably Geneva have been advised by actuaries etc that the risk is less than they had provisioning for so they can now take the opportunity to provision less. Sounds fine to me.

How many GFC's (Global Financial Crisies) have we had since the Great Depression? Answer : 1
Have we not read of all the extra capital requirements and disclosure imposed by Government's and Central Banks since the GFC?

I think Rpoger is being unreasonable.

[Beagle]

You are perfectly entitled to your opinion. You are not aware of all the shenanigans the company was engaged in that I refer to in post #20 above. Does a leopard change its spots...enough said.