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  1. #31
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    Quote Originally Posted by Roger View Post
    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.
    Geneva have accounted for an impaired asset release 'refund' in each of FY2015 and FY2016. This would indicate that the provisioning, at least in FY2015 and FY2016, has been sufficient. Furthermore, the impaired asset release of $0.234m in FY2016 came despite the reduction in provisioning.

    $54.576m of receivables were on the books as at EOFY2016. The provision for impairment ($29.448m) has already been netted off this figure. If the provisioning had been at FY2015 levels (41%) there would have been a further impairment charge of:

    ($54.576m + $29.448m) x (0.41-0.35) = $5.041m

    Net profit, with tax added back amounted to:

    $3.529 + $1.150m = $4.679m

    or at the 28% tax rate $4.901m

    So Roger is quite correct when he says that it is only the reduction in provisioning that has enabled Geneva to make a profit.

    SNOOPY
    Last edited by Snoopy; 03-09-2017 at 07:08 PM.
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  2. #32
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    Default Story Summary: FY2016 Perspective (Part 2)

    Quote Originally Posted by Snoopy View Post
    ROE (return on shareholder equity) 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 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.
    Can we identify what is driving these three companies' profits?

    Return on Equity (my post 6) is showing a big advantage to Geneva Finance (although this is greatly assisted by the income tax refund for FY2016). The returns from 'Heartland Bank' and 'Turners Finance' are little more than half that being achieved at Geneva Finance. It is informative to observe that the ROE for 'Turners Limited', the whole group, is higher than the 'Turners Finance' subsidiary. Some companies are propped up by their finance division. But in the case of Turners it is the other divisions collectively that prop up finance. (edit: 04-09-2016: the preceding sentence is not true if I redirect the 'interest revenue' and associated profit from the 'automotive retail' segment to the 'finance segment'. In fact it is the finance business that is propping up the retail business). This is good for Turners shareholders, as it is only possible to buy shares in the whole Turners group (dubbed 'Turners Limited': ROE 12.2%).

    Return on Shareholder Equity (ROE)
    Heartland Bank 10.9%
    Turners Finance 10.6% (04-09-2017: reassessed as 14.3%)
    Geneva Limited 19.4%

    If we now switch to 'Net interest margin' (my post 9) there is a very clear hierachy with Heartland being the 'lowest' (4.35%) and Turners Finance the 'highest' (14.0%) , with Geneva in the middle (10.6%). Of course 'interest margin' is only one component of costs. A more complete measure is 'Net Profit Margin' (my post 22) showing Heartland at (20.1%), Turners Finance at 26.5% (04-09-2017: reassessed as 27.3%) and Geneva at (28.9%).

    Net Interest Margin Net Profit Margin
    Heartland Bank 4.35% 20.1%
    Turners Finance 14.0% (04-09-2017: reassessed as 16.7%) 26.5% (04-09-2017: reassessed as 27.3%)
    Geneva Limited 10.6% 28.9%

    Perhaps the difference in the relative rankings comes down to how efficient each company is in dealing with non-interest related costs?

    Of course 'net interest margin' and 'net profit margin' can equally well be raised by charging a higher interest rate to the borrower. But in an open and competitive finance environment, I feel it is not too much of an oversimplification to say that most of the 'competitive advantage' for each player will depend on how each finance company can control their costs. So for the purpose of this exercise I will ignore any 'premium pricing' that any of these three companies might be able to charge.

    Looking at the table below you can see that 'interest expense' makes up a very different part of the total expenses, depending on which company you are looking at.

    Interest Expense (% total) Insurance Division Expense (% total) Impaired Asset Expense (% total) Operating Expenses (% total)
    Heartland Bank (FY2016) $118.815m (58.8%) N/A $13.501m (6.7%) $69.872m (34.6%)
    Dorchester Finance (FY2014) $3.857m (14.2%) $3.765m (13.9%) $0.532m (2.0%) $19.002m (70.0%)
    Geneva Limited (FY2016) $3.372m (34.2%) $0.229m (2.3%) ($0.234m) (-2.4%) $6.484m (65.8%)

    [In the above table I have had to revert to FY2014 results for Turners Limited (or Dorchester as it was then). Because of the subsequent amalgamation of Dorchester with the old Turners Auctions, there is insufficient disclosure for me to compile this table for 'Turners Finance' from the FY2016 results. Nevertheless the core of 'Turners Finance' is the old Dorchester. So these figures should be at least indicative of how 'Turners Finance' operates today.]

    It is very apparent from this table that for Turners Finance (Dorchester), 'net interest expense' is a relatively small component of the total expenses (just 14%), compared to Geneva and Heartland. So this could explain why what looks like by far the best 'Net Interest Margin', does not translate to a similarly higher 'Net Profit Margin' compared with the two comparators.

    To summarize, 'ROE' and 'Net Profit Margin' are useful indicators of profitability. 'Net Interest Margin' tends to be something that the banks talk about. The greater the scale of interest expense, compared to other expenses, the more important it is. In the case of Heartland Bank, by far the biggest player of the three, interest expense is by far the most significant cost. And once you have established a core 'bricks and mortar' base, leveraging those lease commitments by making more and more lending to customers makes sense. Such a policy will increase even further the importance of interest rate margin. The more traditional finance companies may only have one office nationwide. That saves on rental expenses. But they still need a back office of core people and a cutting edge computer system. Ultimately there are fewer customers to spread these capital costs over. In the case of Turners the high interest margin, while welcome for shareholders, has not translated to similarly outsized profitability. My conclusion is that 'Net Interest Margin' is not a particularly good yardstick with which to measure the profitability of finance companies

    SNOOPY
    Last edited by Snoopy; 19-11-2018 at 09:32 PM.
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  3. #33
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    Quote Originally Posted by Snoopy View Post

    $54.576m of receivables were on the books as at EOFY2016. The provision for impairment ($29.448m) has already been netted off this figure. If the provisioning had been at FY2015 levels (41%) there would have been a further iimpairment charge of:

    ($54.576m + $29.448m) x (0.41-0.35) = $5.041m

    Net profit, with tax added back amounted to:

    $3.529 + $1.150m = $4.679m

    or at the 28% tax rate $4.901m

    So Roger is quite correct when he says that it is only the reduction in provisioning that has enabled Geneva to make a profit.

    SNOOPY
    That's quite scary. So you are saying that if provisioning was held at the same level as prior year there would have been $0.00 or thereabouts profit? That does go to show that they are very reliant on loans coming good and if SHTF, then it could be all over. So keep a good eye on the market if you are in this stock I think.

  4. #34
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    Quote;
    "He who sups with the devil should have a long spoon."

  5. #35
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    I think that what all have said here can be true to a certain degree but IMHO what you all have overlooked is the largest shareholder.
    In case you are not aware FPG , a private island trading company owned by Alistair & Alan Hutchison owns 58% of the shares of Geneva he is also a director of Geneva in conjunction with his son Alan.
    Alistair Hutchison owns some 24% of CBL a N Z listed company which has M C of a $800 million + .
    If one looks up their names in the N Z Companies office you will see a long list of companies which he either owns or is a director of .
    Its my betting that there is no way that with his stewardship that Geneva will fail with its rebuild and Im also thinking that there will be some sort of a twist involving either CBL, FPG or the Hutchisons, it could be a long shot but one that should be in the back of investors minds.

  6. #36
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    Default Story Summary: FY2016 Perspective (Part 3)

    Quote Originally Posted by Snoopy View Post

    A third measure of efficiency is the underlying gearing of the loan book. 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. The first is to underestimate the impaired asset position. I look at the declared impaired asset position in relation to the total loan portfolio, including impared assets, to get a feel for this. The second way is to borrow to the hilt against your capital base. My preferred indicator for this is MDRT of 'minimum debt repayment time'. 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?
    Liabilities (Shell) (A) Assets (Shell) (B) (A/B) Provision for Impairment (C) 'Net Receivables' + 'Provision for Impairment' (D) (C/D) Minimum Debt Repayment Time (MDRT) -{years}
    Heartland Bank FY2015 $78.790m (*) $166.311m (*) 47.4% (*) $25.412m $2,887.482m 0.88% 12.1
    Heartland Bank FY2016 $48.853m $196.389m 24.3% $21.161m $3,135.118m 0.68% 9.9
    Heartland Bank FY2017 $33.335m $170.076m 19.6% $25.865m $3,571.762m 0.72% 11.2
    Turners Finance FY2015 $15.121m $16.801m 90% $6.986m $149.813m 4.7%
    Turners Finance FY2016 $13.839m $15.377m 90% $6.776m $174.374m 3.9%
    Turners Finance FY2017 $5.342m $5.935m 90% $6.028m $213.171m 2.8%
    Turners Limited FY2015 7.4
    Turners Limited FY2016 9.8
    Turners Limited FY2017 12.1
    Geneva FY2015 $8.065m $8.959m 90% $29.631m $71.464m 41% 17.7
    Geneva FY2016 $13.547m $15.052m 90% $29.448m $84.024m 35% 11.1
    Geneva FY2017 $18.090m $20.100m 90% $29.889m $93.966m 26% 8.0

    (*) These figures from Heartland Reporting Bank

    The above is a hyper-table made from three of my posts: 10, 11 and 21. The figures of particular interest are those in the three 'box headed' columns. The table shows that the company with by far the strongest 'shell' (that means all the customer borrowings and lendings have been stripped out) is Heartland Bank (look at column A/B). The strength of a company's shell is important in that it can provide a buffer of funds if some loans go bad.

    Look across to column C/D, and you will see that Heartland also has the lowest (in proportional terms) provision for bad loans. Keep looking down that column and you will see that the three companies are more 'comparative' than 'comparable'. The provision for impairment for each finance company is reflective of the market they are loaning to. So different are these markets, the scale of provisioning is an order of magnitude higher as you go down the table. Loaning to a higher risk market is fine if your business model is fully reflective of the higher risk. IOW you will need to be very sure your profit margin is high enough to cover the higher bad debt write offs. One (indirect) measure of how to balance this balance of this risk is 'MDRT'. A company with a low MDRT is more profitable with respect to its underlying debt burden. And higher profitability also indicates a superior ability to deal with bad debts from customers too.

    The table shows that 'Turners Limited' (FY2015 perspective) is the best of the three at balancing the risk/reward equation (from an operational prespective). Turners Limited is the parent company of the Turners Finance company we are looking at. As a shareholder we can only invest in the parent 'Turners Limited'.

    Roll forward to FY2016 and you can see that the MDRT figures have converged. Heartland now offers the better operational risk reward ratio (although you could argue the difference between the three is no longer significant). But what about as a potential investment?

    Put simply the 'operational performance' is what you get. The current share price, the price for investors, reflects what you pay. So the best 'operational performance' might not reflect the best potential 'investment performance' for a new shareholder buying in today going forwards.

    This whole post is about 'resilience'. If everything goes really well. then none of these table figures matter. Because none of these companies will need to 'bail out' any more loans than they have already dealt to. Furthermore, 'repaying all underlying company debt' (what MDRT is measuring) is calculated to show what is possible. From a capital efficiency perspective, it could be a bad thing to repay all underlying debt.

    SNOOPY
    Last edited by Snoopy; 24-05-2018 at 01:43 PM. Reason: Add FY2017 results (Heartland)
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  7. #37
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    Quote Originally Posted by Snoopy View Post
    A third measure of efficiency is the underlying gearing of the loan book. 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.
    Quote Originally Posted by Snoopy View Post
    The table shows that the company with by far the strongest 'shell' (that means all the customer borrowings and lendings have been stripped out) is Heartland Bank (look at column A/B). The strength of a company's shell is important in that it can provide a 'buffer' of funds if some loans go bad.
    A point of clarification: Any finance company with a 'strong underlying shell' can use that strength to either:

    1/ Leverage up the underlying balance sheet to make more loans underpinned by the same capital base and so become more profitable. OR
    2/ Use that extra capital to effectively shore up a deteriorating balance sheet, because some customer loans have had to be written down.

    So a 'strong shell' can be thought of as BOTH an engine for growth AND a measure of a finance company's resilience.

    Take money out of your 'strong shell':

    1/ Some money could be used for growth.
    2/ Some money could be used to cover bad debts.
    3/ All of the money could be used for just 1/ or just 2/

    But the same money cannot be used for both growth and supporting bad loans at the same time!

    SNOOPY
    Last edited by Snoopy; 19-05-2017 at 06:20 PM.
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  8. #38
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    Default Story Summary: FY2016 Perspective (Part 4)

    Quote Originally Posted by Snoopy View Post
    The 'operational performance' is what you get. The current share price, the price for investors, reflects what you pay. So the best 'operational performance' might not reflect the best potential 'investment performance' for a new shareholder buying in today going forwards.

    This whole post is about 'resilience'. If everything goes really well. then none of these table figures matter. Because none of these companies will need to 'bail out' any more loans than they have already dealt to. Furthermore, 'repaying all underlying company debt' (what MDRT is measuring) is calculated to show what is possible. From a capital efficiency perspective, it could be a bad thing to repay all underlying debt.
    The next question to address is the 'comparative value' of the growth engine question.

    A statement contained in the Chairman's annual report from Westpac for FY2016 haunts me:

    "Returns of Australian banks are in-line with other leading banking systems and the market. The average return on equity (ROE) of the Australian major banks is currently around 12-15%, broadly similar to other high quality banking markets such as Canada or the Scandinavian countries. That return is above the return of the ASX200 of closer to 11% but below returns of other service industries. Australian major bank returns are above markets such as the UK, parts of Europe and in the US. These markets are under-performing and in many respects are still recovering from the GFC, and as such are delivering performances to which we should not aspire. Separately, while Australian banks make large profits, these profits are in line with their size."

    From my post 6, ROE for Heartland Bank was 10.9%, Turners Finance 10.6% (now revised up to 14.3%) and Geneva Finance 19.4% (FY2016 perspective). So Heartland is turning in a pretty average performance from a capital efficiency perspective in comparison with all ASX companies. And they are turning in a less than favourable performance in comparison with Australian banks. The performance of Geneva looks good. But if we look at the last five years (FY2016 perspective) at Geneva the picture changes:

    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 (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%(*)

    (*) This figure differs from that previously referred to in the above paragraph (and my post 6) , because it uses a quicker (less accurate) calculation method, which is nevertheless sufficient for this purpose.

    Performing a similar exercise for Turners Limited is problematic because the group has been evolving so fast. But if we equate the subsidiary Turners Finance with the old Dorchester, then we can look at a five year historical picture of sorts.

    EOFY2012 EOFY2013 EOFY2014 EOFY2015 EOFY2016 EOFY2017
    Dorchester/Turners Finance NPAT (A) ($1.543m) ($0.133m) $4.892m $4.604m $8.691m $9.019m
    Dorchester/Turners Finance S/H Equity (B) $24.167m $33.190m $74.052m $57.82m $63.87m $54.431m
    Dorchester/Turners Finance ROE (A)/(B) -7.3% -0.40% +6.6% +8.0%(*) +13.6%(*) +16.6%(*)

    (*) This figure differs from that previously referred to in an above paragraph (and my post 6) , because it uses a quicker (less accurate) calculation method, which is nevertheless sufficient for this purpose.
    (06-09-2107 edit: earnings figures for Turners Finance restated to retrieve finance income shunted into Automotive Retail segment.)

    The equivalent Heartland table is below (From my post 8495 on the Heartland thread):

    EOFY2012 EOFY2013 EOFY2014 EOFY2015 EOFY2016 EOFY2017
    Heartland NPAT (A) $30.476m $26.804m $36.039m $47.743m $53.346m $60.355m
    Heartland S/H Equity (B) $374.796m $370.542m $452.622m $480.125m $498.341m $569.595m
    Heartland ROE (A)/(B) 8.1% +7.2% +8.0% +9.9% (*) +10.7% (*) +10.6% (*)

    (*) This figure differs from that previously referred to in an above paragraph (and my post 6), because it uses a quicker (less accurate) calculation method, which is nevertheless sufficient for this purpose.

    The five year picture shows insufficient ROE consistency (>15% for five years, one setback allowed) to assume that modelling using a future growth model is reliable, for all three protagonists. None of our three protagonists stack up well against the Australian banks record. Even against a basket of other ordinary companies I would rate all three as 'below average'. In this situation I prefer a business cycle 'dividend capitalisation valuation' method to assess these finance companies. Any growth valuation above this must be largely a matter of faith, both in management and in the markets they operate in. Faith based on strong grounds can be rewarding. Faith based on a rocky foundation is more of a gamble.

    SNOOPY
    Last edited by Snoopy; 26-05-2018 at 03:42 PM. Reason: Added FY2017 results for Heartland
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  9. #39
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    Quote Originally Posted by Roger View Post
    Barge pole material, not to be trusted under ANY CIRCUMSTANCES, my opinion expressed above remains unchanged.
    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 ?

  10. #40
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    Default Return Standards for an Investment Spectrum

    Quote Originally Posted by Snoopy View Post
    The next question to address is the 'value' question.
    When valuing finance companies, I find it useful to remember that not all of the loan books are of the same quality. Any shareholder should require a higher return on those fainance companies operating in the more risky part of the investment spectrum.

    Category Example Acceptable Yield
    Tier 1 Finance Industry Company ANZ Bank 6.5%
    Tier 2 Finance Industry Company Heartland Bank 7.5%
    Tier 3 Finance Industry Company Geneva Finance 8.5%

    I have left Turners Finance out of this table, because as a shareholder you cannot invest in it, without investing in the whole 'Turners Limited' group. Logic suggests that Turners Finance might be a Tier 3 proposition. Yet because of the strong position Turners holds in the retail vehicle market, I would regard a gross dividend yield rate of 7.5% as acceptable in this investment context.

    SNOOPY
    Last edited by Snoopy; 10-06-2017 at 12:58 PM.
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