TRA - Turners Automotive Group [previously TNR - Turners Limited]

[zigzag]

No such luck zigzag. Sitting on top of my dog kennel typing sounds much more entertaining. Of course if you want to write up your own story around Dorchester please share. Perhaps my summary is just a compostable version of 't-h-i-s' after all?

SNOOPY

Sorry Snoops, but I do not have the time, inclination or the ability to reply to your in depth forensic analysis. Maybe when I retire! But don't mind me. Keep up the good work.

[Sgt Pepper]

As a novice share investor with modest amount of investment cash I currently have 2500 DPC shares, and aspire to own more. I like DPCs prospects a lot and it appeals to my contrarian instincts. I am in awe of the intelligent analysis and practical advise on this site and log in most days. A friend of mine is a successful investor gave his sage advice to me
1.Never listen to Brokers, in his opinion they are a complete waste of time.(his description of brokers was somewhat more colourful and shall we say very direct)
2. Read lots and do you own analysis

Is a a share price of 50cents realistic?

[Under Surveillance]

Is a a share price of 50cents realistic?

Not this week!!
Could become so if/when they look likely to deliver on the forecast profit before tax for FY 2016 of over $20M as a result of combined generic and M&A growth [see Managing Director's address to 2013 AGM]? Provided, that is, they haven't issued more than the mooted 100M additional new shares in the meantime.

[GTM 3442]

As a novice share investor with modest amount of investment cash I currently have 2500 DPC shares, and aspire to own more. I like DPCs prospects a lot and it appeals to my contrarian instincts. I am in awe of the intelligent analysis and practical advise on this site and log in most days. A friend of mine is a successful investor gave his sage advice to me
1.Never listen to Brokers, in his opinion they are a complete waste of time.(his description of brokers was somewhat more colourful and shall we say very direct)
2. Read lots and do you own analysis

Is a a share price of 50cents realistic?

It has been instructive to follow the options, consolidations, acquisitions, placements, conversions, and so on in DPC over the past year or so. And to condiser the likelihood of future options, consolidations, acquisitions, placements, conversions, and so on over coming years.

Given enough time, 50c is certainly achievable. The question is when - how much time is more than enough ? I suspect that there are likely to be better uses for your money in that time.

Then again - five, or ten, or twenty thousand or so slung in a bottom drawer may prove rewarding one day.

[Snoopy]

My above analysis of DPC is largely based on the post fund raising balance sheet of DPC as outlined in the pro-forma balance sheet slide presented to shareholders at the AGM on 23rd August 2013. However, to an extent this is a moot observation because the Chairman has clearly signalled that DPC is on the acquisition trail.

From the Chairman's AGM address:
"While there will be a range of views on what gearing or equity ratio is appropriate for a financial services company such as Dorchester, the Boards’ view is that there is some $50m of borrowing capacity to fund merger and acquisition opportunities."

Simple subtraction from the $67.4m of shareholder equity on the pro-forma balance sheet leaves $17.4m. I interpret that to mean that $17.4m is sufficient equity to 'cover' the existing working assets of the company comprising:

Finance Receivables of $31.4m, Reverse annuity mortgages of $17.7m, Financial assets including Funds Under management of $16.8m. These total financial working assets, that are ultimately owned by other parties not DPC add up to $65.9m.

$17.4m/$65.9m = 26.4%

This is in accordance with the >20% 'Tier 1' capital standard imposed by UBS and First NZ Capital on PGGW Finance, before PGGW finance amalgamated with Heartland bank.

Of course if you subtract out the $26.2m of intangible assets on the books then DPC would be in net negative shareholder asset position. I guess that is a strong argument to show that it is not appropriate to strip out intangible assets in this situation?

Have been doing a bit of cross company reference in an attempt to answer my own question. On page 92 of the FY2013 Westpac annual report there is the following quote:

"Common Equity Tier 1 capital consists of paid-up share capital, retain profits and certain reserves less the deduction of certain intangible assets, capitalized expenses and software, and investments and retained earnings in insurance funds and management subsidiaries that are not consolidated for capital adequacy purposes."

I can see why reducing the book value of the common equity tier 1 capital is reduced for capital adequacy purposes. It is because all of those exceptions are not readily convertible to cash in the event of a financial shock. But in the case of of a growing DPC, this does present a dilemma.

If DPC accumulates goodwill by buying incrementally profitable finance businesses to increase their critical mass and profitability, this will surely be good for profits. But if the goodwill accumulated through those acquisitions had to be disregarded in any capital adequacy calculations, then suddenly the capital adequacy of DPC could be judged inadequate - at least on paper. Of course DPC would have the easy solution of selling off parts of the business that it had just bought and, assuming those business units profitability has been maintained, booking that goodwill as real cash. But such a reaction would reverse the profit gains as well!

Does anyone have an answer to what seems a potential regulatory dilemma here?

SNOOPY

[Snoopy]

They are not a bank so the capital adequacy rules don't apply.

Dorchester not a bank? Quite right Black Knat. Of course Tier 1 capital is a term that generally refers to banks, so I apologise for being sloppy with my technical phrasing.

Capital adequacy rules don't apply? Not true in the general sense as Non Bank Deposit Takers (NBDT) entities are still subject to capital adequacy rules.

However, I see Dorchester was granted an exemption in 2010.

----

Dorchester Receives Deposit Takers (Moratorium) Exemption
22 February 2010

The Reserve Bank of New Zealand has issued Dorchester Finance Ltd with a Deposit Takers (Moratorium) Exemption from the rating requirement of the NBDT regime.

Dorchester Finance Ltd has been exempted from the requirement to have a credit rating on the basis that it is currently in moratorium and does not accept any subscriptions from the public for debt securities.

-----

Nevertheless, it seems this exemption was revoked on 1st March 2013. So from where I sit my original question remains valid. Please correct me if I am wrong.

SNOOPY

[Under Surveillance]

From the RBNZ website:

A minimum capital ratio is required to be included in NBDTs’ trust deeds. This ratio must be at least 8 percent for NBDTs with a credit rating from an approved credit rating agency. For those without a credit rating from an approved rating agency, the minimum capital ratio specified in the trust deed must be at least 10 percent.

[Under Surveillance]

Here you go, Snoopy.

Ken Mathews of the RBNZ has advised me (very promptly, after an email enquiry) that:

Our understanding is that Dorchester Finance does not fall within the current definition of a non-bank deposit taker (set out in s157C of the RBNZ Act) as it does not offer debt securities to the public in New Zealand. Therefore, it is not regulated or supervised as a non-bank deposit taker.

[Snoopy]

Here you go, Snoopy.

Ken Mathews of the RBNZ has advised me (very promptly, after an email enquiry) that:

Our understanding is that Dorchester Finance does not fall within the current definition of a non-bank deposit taker (set out in s157C of the RBNZ Act) as it does not offer debt securities to the public in New Zealand. Therefore, it is not regulated or supervised as a non-bank deposit taker.

Appreciate your work on this U.S..

What threw me was the expiry date on the Reserve bank supervision. Prior to the moritorium, Dorchester had been taking deposits from the public. So I guess the legislation of the "Deposit Takers (Moratorium) Exemption" was drafted on the assumption that some time far into the future (as 2013 was in 2010), Dorchester would be taking money from the general public again. As long as they don't, then no need for Reserve bank supervision of Dorchester Finance.

I see from the November half year profit announcement that:

"DPL Insurance Limited (another branch of Dorchester) was assigned a rating of B+ (good) by rating Agency A.M. Best in July 2013. The business was issued a full insurance licence under the new insurance regulations administered by the Reserve Bank in August 2013."

I take it from that there must be some financial covenants on Dorchester, even if they do not relate directly to the finance division?

SNOOPY

[Under Surveillance]

I see from the November half year profit announcement that:

"DPL Insurance Limited (another branch of Dorchester) was assigned a rating of B+ (good) by rating Agency A.M. Best in July 2013. The business was issued a full insurance licence under the new insurance regulations administered by the Reserve Bank in August 2013."

I take it from that there must be some financial covenants on Dorchester, even if they do not relate directly to the finance division?

SNOOPY

As far as I can see, DPL and DPC (and perhaps other segments of DPC) are "associated person(s)" under the Insurance (Prudential Supervision) Act. There are a cartload of requirements for licensed insurers to submit information relating to associated persons to RBNZ as required, and associated persons must cough up necessary information to licensed insurers to pass to RBNZ. I've no idea what pressure that might place through DPL on the rest of DPC to be financially circumspect.
From memory the director of DPC from the DPL side is paid more than the remaining directors (other than the Chairman). What burden that reflects I won't guess at.