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07-10-2020, 09:26 AM
#13821
Originally Posted by Beagle
It was intended as a tongue in cheek post.
Apologies
I have edited my post to make it of more general nature
“ At the top of every bubble, everyone is convinced it's not yet a bubble.”
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07-10-2020, 09:44 AM
#13822
Originally Posted by winner69
a view of a quite a few it seems
When investors start talking like this is it a modern day ‘shoeshine boy’ moment
Interest rates are low for a reason.
Such a strategy might be OK today but one day in the future one will need to quickly implement the good old ‘capital preservation’ plan
You are advocating an alternative of buying bonds with interest rates at all time lows as a capital preservation strategy? Or alternatively putting your money in the bank in a term deposit that will take a haircut in a serious downturn because NZ is one of the few countries where bank deposits are not insured and so not capital guaranteed?
SNOOPY
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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07-10-2020, 10:20 AM
#13823
Yes I was going to make a comment regarding equities and the conundrum of TRINA (There really is no alternative to equities). I have had significant fixed interest investments mature in the last few weeks and more next week and have been busy adding too and buying a number of quality companies and I haven't finished yet by any means. There really is no alternative with interest and bond rates where they are today.
Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”
Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine
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07-10-2020, 10:20 AM
#13824
Originally Posted by Snoopy
You are advocating an alternative of buying bonds with interest rates at all time lows as a capital preservation strategy? Or alternatively putting your money in the bank in a term deposit that will take a haircut in a serious downturn because NZ is one of the few countries where bank deposits are not insured and so not capital guaranteed?
SNOOPY
No Snoops
The 'capital preservation' trick sometime in the future is using the liquidity of the equity markets to sell up the once high yielding shares when the share price inevitably starts to fall
“ At the top of every bubble, everyone is convinced it's not yet a bubble.”
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07-10-2020, 12:34 PM
#13825
BC3/ Underlying Gearing Ratio FY2020
Originally Posted by Snoopy
The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.
According to the full year (FY2019) statement of financial position the debt excluding borrowings is:
$22.498m + $7.532m + $10.372m = $40.402m (1)
-----
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:
$4,926.404m - ($3,029.231m +$1,318.819m + $11.132m + $354.928m) = $212.294m
We are then asked to remove the intangible assets from the equation as well:
$212.294m - $72.679m = $139.615m (2)
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:
$40.402m/$139.615m= 28.9% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
FY2019 |
Target |
Underlying Gearing Ratio |
20.2% |
14.7% |
40.5% |
58.4% |
37.4% |
37.6% |
39.4% |
28.9% |
< 90% |
The underlying debt of the company (debentures and other loan supporting borrowings removed) is the first factor in an attempt to assess the underlying shareholder owned skeleton upon which all the receivables that are loaned ultimately sit.
According to the full year (FY2020) statement of financial position the debt excluding borrowings:
$36.262m + $12.303m + $17.012m + $20.456m = $86.033m (1)
-----
To calculate the total underlying company assets we have to (at least) subtract the finance receivables from the total company assets. I would argue that you should also subtract the 'Investment Properties' (the rump of the problem property portfolio) and the unspecified 'Investments' (held on behalf of policy beneficiaries) from that total:
$5,318.136m - ($3,045.195m +$1,538.685m + $11.132m + $413.340m) = $309.784m
We are then asked to remove the intangible assets from the equation as well:
$309.784m - $72.813m = $236.971m (2)
----
Now we have the information needed to calculate the 'underlying company debt' (skeletal picture) net of all Heartland's lending activities [ (1)/(2) ]:
$86.033m/$236.971m= 36.3% < 90%
Result: PASS TEST
The historical picture of this ratio is tabulated below.
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Target |
Underlying Gearing Ratio |
37.4% |
37.6% |
39.4% |
28.9% |
36.3% |
< 90% |
SNOOPY
Last edited by Snoopy; 07-10-2020 at 02:20 PM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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07-10-2020, 03:23 PM
#13826
BC2/ EBIT to Interest Expense ratio FY2020
Originally Posted by Snoopy
This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2019:
The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs
EBIT (high estimate) = $334.330m - $85.589m= $248.741m
Interest expense is listed as $136.747m.
So (EBIT)/(Interest Expense)= ($248.741m)/($136.747m)= 1.82 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. It looks to be getting better and better.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
FY2019 |
Target |
EBIT/ Interest Expense |
1.15 |
1.22 |
1.44 |
1.52 |
1.65 |
1.79 |
1.82 |
1.82 |
>1.2 |
This is an assessment method of looking at the underlying earning power of Heartland Group Holdings, compared to the interest bill they face while making their earnings. Updating for the full year result FY2020:
The EBIT figure is not in the financial statements. So I will use 'interest income' as an indicator for EBIT, once I have taken out the selling and administration costs
EBIT (high estimate) = $346.802m - $106.794m= $240.008m
Interest expense is listed as $130.129m.
So (EBIT)/(Interest Expense)= ($240.008m)/($130.129m)= 1.84 > 1.20
Result: PASS TEST
The historical picture of this ratio is tabulated below. It looks to be getting better and better.
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Target |
EBIT/ Interest Expense |
1.65 |
1.79 |
1.82 |
1.82 |
1.84 |
>1.2 |
This is turning into a very solid picture of ever improving interest cost cover over the years,
Working Note
A thought did cross my mind that, with the adoption of IFRS16, I should adjust my calculation this year. IFRS16 has caused the 'operating expenses' that I have used above to decrease. This is because what was last year a straightforward 'tax deductible lease payment' has been removed from the expenses and replaced with:
1/ An extra depreciation charge on an IFRS16 created 'Right to Occupy' asset. (Found under Note 6 to be $2.324m}
2/ An extra interest charge on the 'IFRS16 created', and 'Right to Occupy asset offsetting' 'Capitalised Lease Contract' liability. (I can't find this. Is it subsumed in Note 3, 'Interest Expense', 'Other Borrowings' of $35.888m? )
I feel inclined to add that 'Right to Occupy' Asset depreciation (1/ above) back onto the operating expenses (effectively lowering the EBIT I have estimated) , and make an adjustment -downwards- on the interest expense denominator in my ratio calculation by taking into account 2/. But should I do this? I feel it will take a real accountant to answer that question!
SNOOPY
Last edited by Snoopy; 07-10-2020 at 03:59 PM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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07-10-2020, 11:35 PM
#13827
Hi Snoopy
Interest on right to use lease liabilities is at the bottom of page 38 of $570k. I think that is what you are seeking.
Regarding how to treat this, options:
1) forever adjust to how it used to be based on sensible pre-IFRS16 accounting per your suggested replacements;
2) do not adjust in future but instead adjust prior year numbers, or
3) use the raw numbers as is, with a footnote noting the change in methodology.
Option 2 may not be possible given the lack of data.
Option 3 is easiest. If you use Option 3 it might be worth noting the impact on the ratio - it may not be material - my back of the fag packet suggests the ratio of 1.84 becomes maybe 1.85.
Option 1: adjusting the $130m for the $570k assumes it is part of the $130m which, in the absence of contradictory information, suggests this may be correct. An alternative is that it sits under operating expenses given it is not related to lending but I cannot see any reference to how it is treated. FYI I believe the payments on these leases were $2,005k per page 9 which would be the "lease expense" using the old methodology (prior year was 1,807k per page 21). This value of $2,005 also reconciles with the movement in the lease liabilities & right to use assets year on year.
I trust that helps.
Last edited by Ferg; 07-10-2020 at 11:37 PM.
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08-10-2020, 09:42 AM
#13828
Originally Posted by Ferg
Hi Snoopy
Interest on right to use lease liabilities is at the bottom of page 38 of $570k. I think that is what you are seeking.
Regarding how to treat this, options:
1) forever adjust to how it used to be based on sensible pre-IFRS16 accounting per your suggested replacements;
2) do not adjust in future but instead adjust prior year numbers, or
3) use the raw numbers as is, with a footnote noting the change in methodology.
Option 2 may not be possible given the lack of data.
Option 3 is easiest. If you use Option 3 it might be worth noting the impact on the ratio - it may not be material - my back of the fag packet suggests the ratio of 1.84 becomes maybe 1.85.
Option 1: adjusting the $130m for the $570k assumes it is part of the $130m which, in the absence of contradictory information, suggests this may be correct. An alternative is that it sits under operating expenses given it is not related to lending but I cannot see any reference to how it is treated. FYI I believe the payments on these leases were $2,005k per page 9 which would be the "lease expense" using the old methodology (prior year was 1,807k per page 21). This value of $2,005 also reconciles with the movement in the lease liabilities & right to use assets year on year.
I trust that helps.
Thanks for your work on this Ferg. I am heartened by your back of fag packet calculation that shows this 'issue' I am concerned with only affects the second decimal place of single digit result of the ratio I am looking at. However, as I am sure you are aware, there are other businesses with relatively large leased asset portfolios where IFRS16 makes a huge difference to the published accounts. So I hope you don't mind if I try to increase my understanding on this IFRS16 matter, using Heartland as an example.
I think I am correct in saying IFRS16 is all about reporting what has happened. As far as anyone at an operational level, paying the bills on a day to day basis in any of these IFRS16 affected companies: Nothing has changed.
You say:
"Adjusting the $130m for the $570k assumes it is part of the $130m which, in the absence of contradictory information, suggests this may be correct"
When talking about the 'interest on the right of use assets' of $570k being part of the $130,129m of interest expense, I would say this is beyond doubt. If this were not so, it would mean that the 'interest expense' total would not include all interest expended! That would seem to be an untenable reporting position.
But here is where my interpretation of the situation becomes a little wobbly. If I am correct in my assertion that 'nothing operationally has changed', where does the 'Interest on right to use lease liabilities' on the bottom of page 38 of HGH Accounts for FY2020 of $570k come from? Pre IFRS16, the company just paid the appropriate operating lease expenses every year and they appeared on the books as one of many annual expenses. There was no 'interest to be paid' on this operating lease expense - was there? It seems to me like this extra $570k of interest bill has materialized out of nothing. How can this be?
You say
"This value of $2,005 (the payment of lease liabilities in the Consolidated Statement of Cashflows) also reconciles with the movement in the lease liabilities & right to use assets year on year."
But if you:
1/ Take the 'Depreciation of Right of Use Assets' figure of under Note 18 'Other Balance Sheet Items' of $2.324m at face value AND
2/ Try to adjust that by adding in the extra $570k of new interest expenses on the finance lease then it doesn't reconcile: $2,324m + $570m = $2,894m.
In fact the two comparative totals are 44% out. How do you explain that?
SNOOPY
Last edited by Snoopy; 08-10-2020 at 09:47 AM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
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08-10-2020, 09:36 PM
#13829
Here are my workings supporting my statement "This value of $2,005 also reconciles with the movement in the lease liabilities & right to use assets year on year":
HGH Lease Liabilities - Old Method |
|
|
|
|
|
|
|
|
|
|
|
|
|
A) Pay Lease |
Debit |
|
Credit |
|
Source |
Notes |
|
Lease Expense P&L |
2,005 |
|
|
|
p9 |
Last year $1,807 p21 |
|
Bank Account |
|
|
2,005 |
|
|
|
|
|
|
|
|
|
|
|
HGH Lease Liabilities - New Method |
|
|
|
|
|
|
|
|
|
|
|
|
|
B) Lease Liability Position |
Debit |
|
Credit |
|
Source |
Notes |
1/7/19 |
ROU Asset |
10,728 |
|
|
|
p13, p38 |
|
Deferred Tax Asset |
274 |
|
|
|
p13 says $0.3m |
|
Retained Earnings Adj. |
751 |
|
|
|
p7, p13 |
|
|
Lease Liability |
|
|
11,753 |
|
p12 |
|
|
|
|
|
|
|
|
|
C) 2020 New Leases |
|
|
|
|
|
|
|
ROU Asset |
9,958 |
|
|
|
p8 |
|
|
Adj. (DTA/RE?) |
180 |
|
|
|
? |
part of $256 per p26? |
|
Lease Liability |
|
|
10,138 |
|
derived - see reconciliation below |
|
|
|
|
|
|
|
|
D) 2020 Payments |
|
|
|
|
|
|
|
Lease Liability |
2,005 |
|
|
|
assumed |
|
Bank Account |
|
|
2,005 |
|
p9 |
|
|
|
|
|
|
|
|
|
E) 2020 Interest |
|
|
|
|
|
|
|
Interest on Leases P&L |
570 |
|
|
|
p38 |
|
|
Lease Liability |
|
|
570 |
|
assumed |
|
|
|
|
|
|
|
|
F) 2020 Depreciation |
|
|
|
|
|
|
|
Depreciation P&L |
2,324 |
|
|
|
p38 |
|
|
ROU Asset |
|
|
2,324 |
|
p38 |
|
|
|
|
|
|
|
|
|
Reconciliations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU Assets: |
|
|
|
|
|
|
|
Opening Balance |
10,728 |
|
|
|
p13, p38 |
|
Add New Leases |
9,958 |
|
|
|
p38 |
|
|
Less Depreciation |
-2,324 |
|
|
|
p38 |
|
|
Closing Balance |
18,362 |
|
|
|
p8, p38 |
|
|
|
|
|
|
|
|
|
ROU Liabilities: |
|
|
|
|
|
|
|
Opening Balance |
11,753 |
|
|
|
p12, p13 |
|
Add New Leases |
10,138 |
|
|
|
derived |
|
|
Less Payments |
-2,005 |
|
|
|
p9 |
|
|
Add Interest |
570 |
|
|
|
p38 |
|
|
Closing Balance |
20,456 |
|
|
|
p8, p38 |
|
Last edited by Ferg; 08-10-2020 at 09:40 PM.
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09-10-2020, 08:50 AM
#13830
Got my DRIP shares allocated this morning at $ 1.24695055 a piece, very happy
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