ANZ.NZX - Anyone holding?

[winner69]

I think it could be ahead of schedule. I am waiting to buy when it does hit $28

...probably waiting until its $25 now

[lawson]

Not waiting for any price now. Not looking to buy at the moment. I'm doing the part of the Hokey-kokey where you put your left foot out - so mostly out now of most things

[Snoopy]

Can't find a 'prospectus 70' that details the performance of UDC over FY2016.

It also seems that the previous links to past year prospectuses that I have given have been wiped by the company. However, some relevant financial statements may be found here:

https://www.udc.co.nz/investing/important-documents

Looking at

https://www.udc.co.nz/pdf/Full-Finan...ments-2016.pdf

The 'profit before tax' is listed as $81.417m (p3). But this includes a provision for credit impairment of $7.418m which I would remove to get the picture of ongoing operational performance. So I get EBT of $88.835m.

Now go to note 3 (p10) on interest expense. There is underlying interest over and above what is due to debenture holders of $18.398m.

So total underlying EBIT = $88.835m + $18.398m = $107.233m (near flat, slightly down on FY2015)

Now turn to page 12 (note 6) and you will see total net loans and advances of: $2,573.030m (nearly a 10% rise on FY2015). Yet despite the big rise in business, underlying operating profit has actually decreased.

The operating margin based on the end of year loan balance book is:

$107.233m/$2,573.030m = 4.17%

Put in context, the operating margin over the last few years has gone like this:

FY2016	4.17%
FY2015	4.63%
FY2014	4.41%
FY2013	4.02%
FY2012	3.87%

I am always suspicious of companies that try to obliterate their financial history. In this instance you can see why. The long trend of increasing margins has ended. It isn't surprising that UDC management don't want this fact widely broadcast to their existing debenture holders. The 8th December 2016 news release from UDC trumpeted the 'record FY2016 profit' only and made no mention of the shrinking operating margins.

With a likely sale of UDC from under the ANZ umbrella, S&P have reduced UDC's long term credit rating by three notches from AA- to A-. This is still better than the likes of Heartland Bank. But I think it is fair to say that UDC have lost their long held 'premium' over other finance company players in the NZ finance market. Something to reflect on for long term UDC debenture holders?

The following information can be found in UDC's FY2017 annual report.

The 'profit before tax' is listed as $85.710m (p3). But this includes a provision for credit impairment of $5.929m which I would remove to get the picture of ongoing operational performance. So I get EBT of $91.639m.

Now go to note 3 (p11) on interest expense. There is underlying interest over and above what is due to debenture holders of $38.655m.

So total underlying EBIT = $91.639m + $38.655m = $130.294m (+22% on FY2016)

Now turn to page 12 (note 6) and you will see total net loans and advances of: $2,911.594m (a 13% rise on FY2016).

The operating margin ( EBIT/'Total Net Loans and Advances' ) based on the end of year loan balance book is:

$130.294m/$2,911.594m = 4.48%

Put in context, the operating margin over the last few years has gone like this:

	Operating Margin
FY2017	4.48%
FY2016	4.17%
FY2015	4.63%
FY2014	4.41%
FY2013	4.02%
FY2012	3.87%

To Summarize: Operating Profit (EBIT) for FY2017 is up strongly, but this is largely due to the much higher interest bill being paid, outside of the the interest due to debenture holders. If you look at note 8, you will see that UDC debenture holders have pulled over $500m out of the company over FY2017. I see this as a significant loss of confidence by the investing public in UDC. This loss of confidence was perhaps precipitated by an announced sale to HNA of China, before that deal was pulled. The credit rating of UDC is now BBB (as assessed by Standard and Poor's) with a negative outlook. This is a very large fall from the AA- rating the company had just one year prior!

The loss of debenture support has been more than made up by the ANZ bank doubling its own capital support for UDC. In November 2007 this facility was further increased to $2,700m by UDC's owner the ANZ bank. At this level, all the remaining UDC debenture holders could be repaid! Since the company is now largely dependent on the ANZ bank to obtain borrowing capital for survival, it is not clear to me that a potential full 'sale' of UDC to another outside buyer by ANZ remains a meaningful proposition.

SNOOPY

[Scrunch]

UDC is dependent on commercial banks providing finance. The commercial bank doing this at the moment is ANZ bank. This could be substituted for another single commercial bank (If they were happy with this level of exposure to a single entity or were the trade buyer) or a group of banks. The key assets are the existing lending book, UDC's name and systems which keep the lending book at this size or growing. This is what you sell.

[Snoopy]

UDC is dependent on commercial banks providing finance. The commercial bank doing this at the moment is ANZ bank. This could be substituted for another single commercial bank (If they were happy with this level of exposure to a single entity or were the trade buyer) or a group of banks. The key assets are the existing lending book, UDC's name and systems which keep the lending book at this size or growing. This is what you sell.

I take your point Scrunch. The point I was trying to make was that the commercial bank funding facility available over the last five years has looked like this

'As Announced' End of Financial Year	Commercial Bank Funding Facility available	Commercial Bank Funding Facility used	Debenture Funding
2014	$800m	$395m (49%)	$1,569m
2015	$1,000m	$280m (28%)	$1,736m
2016	$1,800m	$595m (33%)	$1,592m
2017	$2,700m	$1,385m (51%)	$1,039m

Apparently the downstream effect of the pending (now cancelled) HNA sale (coupled with the UDC credit downgrade) caused a large reduction in the rate of renewal of debentures. The ANZ stepped in and has propped UDC up by supplying any extra credit required. But the mere fact that more bank backup is required would suggest to me the extra cost of the commercial bank funding now required would reduce the value of the UDC as a sales prospect.

If the new buyer (or buyers if UDC ends up being floated) keeps the ANZ as the back up commercial financer, that means the ANZ still retains a substantial exposure to the loan book. So I am not sure if 'selling' UDC would achieve much from an ANZ perspective in this instance.

SNOOPY

[Snoopy]

	UDC			Heartland
	EBT	Loan Book	EBT/Loan Book	EBT	Loan Book	EBT/Loan Book
FY2009	$34.024m	$1,829.156m	1.86%
FY2010	$45.012m	$1,968.771m	2.29%
FY2011	$46.382m	$1,948.552m	2.38%
FY2012	$58.476m	$2,014.473m	2.90%	$29.377m	$2,078.276m	1.41%
FY2013	$66.787m	$2,065.117m	3.23%	$36.540m	$2,010.376m	1.82%
FY2014	$83.501m	$2,272.081m	3.68%	$57.416m	$2,607.393m	2.20%
FY2015	$89.750m	$2,347.163m	3.82%	$76.304m	$2,862.070m	2.67%
FY2016	$88.835m	$2,573.030m	3.45%	$87.689m	$3,113.957m	2.82%

Note:

1/ UDC data for FY2016 is drawn from the 'UDC Finance Annual Report 2016' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2016 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The inter company year on year trend is interesting though. For the first time we see Heartland's earnings to loan book ratio rising, as the equivalent UDC metric is falling. For all previous comparative periods this measure has been moving in the same direction for both UDC and Heartland.

	UDC			Heartland
	EBT	Loan Book	EBT/Loan Book	EBT	Loan Book	EBT/Loan Book
FY2009	$34.024m	$1,829.156m	1.86%
FY2010	$45.012m	$1,968.771m	2.29%
FY2011	$46.382m	$1,948.552m	2.38%
FY2012	$58.476m	$2,014.473m	2.90%	$29.377m	$2,078.276m	1.41%
FY2013	$66.787m	$2,065.117m	3.23%	$36.540m	$2,010.376m	1.82%
FY2014	$83.501m	$2,272.081m	3.68%	$57.416m	$2,607.393m	2.20%
FY2015	$89.750m	$2,347.163m	3.82%	$76.304m	$2,862.070m	2.67%
FY2016	$88.835m	$2,573.030m	3.45%	$87.689m	$3,113.957m	2.82%
FY2017	$91.639m	$2,911.514m	3.15%	$99.568m	$3,545.897m	2.81%

Note:

1/ UDC data for FY2017 is drawn from the 'UDC Finance Annual Report 2017' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2017 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.

Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The underlying cost structures of both protagonists are not the same.

The individual company year on year trend is interesting though. The EBT Margin for UDC continues to decline, even as the previously improving Heartland EBT margin stabilises. Is the unusually large increase in the loan book size ('growth any any cost' to pump up a potential company sale price?) at UDC compromising the profitability for UDC going forwards?

SNOOPY

[Snoopy]

Time to normalise the UDC figures for 2016 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2016 had selling and administration expenses of $69.872m (Heartland FY2016 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $31.623m (UDC Financial Statement 2016, note 4). That is a difference of $38.249m. The two are comparable in that they have a similarly sized loan book (UDC:$2,573.030m, Heartland $3,133.957m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin on assets?

FY2016: ($107.233-$38.249+ $10.011)/$2,573.030 = 3.07%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $10.011m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $38.249m 'extra operating expenses (calculated above, using figures from Financial Statements 2016, note 4). The $10.011m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $10.011m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

This recent year trend in the underlying margin at UDC is

FY2016	3.07%
FY2015	3.53%
FY2014	3.37%
FY2013	2.58%

Time to normalise the UDC figures for 2017 so they can be compared more directly with the likes of Heartland Bank.

Heartland in FY2017 had selling and administration expenses of $71.684m (Heartland FY2017 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $32.427m (UDC Financial Statement 2017, note 4). That is a difference of $39.257m. The two are comparable in that they have a similarly sized loan book (UDC:$2,911.514m, Heartland $3,545.897m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin (EBIT where 'I' is the credit facility interest only) on assets?

FY2017: ($130.294-$39.257+ $9.002)/$2,911.514 = 3.44%

Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $9.002m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $39.257m 'extra operating expenses' (calculated above, using figures from Financial Statements 2017, note 4). The $9.002m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $9.002m which largely reflects a 'branch network allowance payment' must be removed from my comparison.

For Heartland over FY2017 the equivalent calculation of EBIT (where 'I' represents interest paid not connected to debenture holders, and E represents the earnings before write downs) is as follows:

($99.568m+$25.714m) / $3,909.945m = 3,20%

This recent year trend in the underlying margin at UDC and Heartland is compared below:

	EBIT Margin UDC	EBIT Margin Heartland
FY2017	3.44%	3.20%
FY2016	3.07%	3.48%
FY2015	3.53%	3.71%
FY2014	3.37%	3.00%
FY2013	2.58%	2.65%

In this context, FY2016 looks like a negative aberration for UDC. But the EBIT margin for Heartland is showing a declining pattern over the last three years. With UDC up for sale, could the earnings figures for UDC have been manipulated upwards over FY2017 in what is in reality a softer market? 'Earnings' in this context is a special kind of EBIT in which I have eliminated impairment charges. So I have removed the ability to reclassify assets as problem assets, and the ability to manipulate the company's bank loan structure to influence this earnings result. The principal driver of this EBIT is therefore revenue and this is almost impossible to manipulate. Consequently I don't believe the UDC figures are subject to manipulation.

SNOOPY

[Snoopy]

	HNZ (FY2016)	UDC (FY2016)
Agriculture Forestry & Fishing:	$680.680m (19.7%)	$494.192m (18.6%)
Mining:	$14.912m (0.4%)	$11.428m (0.4%)
Manufacturing:	$88.412m (2.7%)	$66.429m (2.5%)
Finance & Insurance:	$339.646m (9.8%)	$88.535m (3.3%)
Retail & Wholesale Trade:	$296.550m (8.6%)	$342.734m (12.9%)
Households:	$1,498.261m (43.3%)	$640.521m (24.1%)
Property & Business Services	$405.469m (11.7%)	$133.353m (5.0%)
Transport & Storage:	$26.715m (0.8%)	$460.450m (17.3%)
Other Services:	$110.747m (3.2%)	$418.199m (15.7%)

Total for Heartland $3,461.4m (100%) , with the collectively impaired assets yet to be adjusted for. This equates to a loan book YOY growth of 6.5%.

Total for UDC $2,655.8m (100%), with credit impairment already adjusted for. This equates to a loan book YOY growth of 9.3%.

My question is, can any of the underperformance of UDC in 'underlying earnings terms' be explained by the markets both UDC and Heartland are lending into?

Looking at the year on year figures, comparing each company to itself one year earlier, I am struck by the following observations:

1/ Heartland's rural loan book grew by 19% YOY. UDC's rural loan book only grew by 8% YOY. One explanation is that Heartland was more generous in rolling over marginal rural loans. This was confirmed on p7 of Heartland AR2016

"Despite the difficult circumstances facing the dairy industry, Heartland continues to support existing clients – which was the primary reason for the growth."

Some might see that as a high risk strategy, as this rollover growth decreased cashflow. Recent dairy price recovery in particular suggests that if a high risk gamble was made, it has paid off.

2/ Heartland's 'finance & insurance' book shrunk by 10% YOY. UDC's 'finance & insurance' book grew by 2% YOY. In big picture terms, finance and insurance is far more important to Heartland (nearly 10% of all business vs only just over 3% for UDC). Curiously the shrinkage of 'finance and insurance' at Heartland came in the year that Heartland acquired the 50% of Marac Insurance (general insurance and income protection) they did not own for $2.3m (a small fish acquisition?). So it must be the 'finance' bit of 'finance & insurance' that did most of Heartland's sector shrinking. Reading through the Heartland annual report, I can't find a mention of any business unit shrinking. So I am mystified as to where the shrinkage in the 'finance & insurance' book at Heartland came from. Given the evidence is that this shrinkage probably did Heartland more good than harm I am interested in solving this riddle. Any ideas? Did Heartland wind up some less profitable loans to large businesses during the year? (refer to p26 of Annual Results 2016 presentation).

3/ UDC are very up front that financing construction is part of their business mix. Heartland do not report 'construction' as a separate business category. So I have combined UDC's 'Construction' figures into the broad 'other services' basket.

UDC construction loans totalled $355.757m at EOFY2016, up from $344.072m at EOFY2015, and a not insignificant 13% of the total loan book. This construction increase of 3% YOY, is well below the average 9.3% YOY growth for the whole of UDC. One explanation for this modest growth is that some construction projects have become problematic. Developer margins have shrunk and UDC margins on these developments have shrunk consummately. Many fortunes have been made on property over the years. But less well advertised is that many have been lost through risky property development. I have heard anecdotal evidence that property developments around Auckland have been shelved. Are UDC feeling the construction pain?

	HNZ (FY2017)	UDC (FY2017)
Agriculture Forestry & Fishing:	$836.977m (21.3%)	$547.780m (18.4%)
Mining:	$19.006m (0.5%)	$15.091m (0.5%)
Manufacturing:	$76.445m (1.9%)	$59.203m (2.0%)
Finance & Insurance:	$395.804m (10.1%)	$70.125m (2.4%)
Retail & Wholesale Trade:	$188.941m (4.8%)	$367.256m (12.3%)
Households:	$1,717.407m (43.7%)	$820.382m (27.5%)
Property & Business Services	$347.776m (8.8%)	$171.163m (5.8%)
Transport & Storage:	$179.016m (4.6%)	$442.523m (14.9%)
Other Services:	$169.867m (4.3%)	$482.258m (16.2%)
Total	$3,931.239m (100%)	$2,975.781m (100%)

Note:

1/ Heartland loans pre impaired asset adjustment. UDC loans post impaired asset adjustment.

The Heartland loan book has grown by 14% over FY2017 (ended 30-06-2017) , compared to a 12% growth over at the UDC loan book over the nearest equivalent period (FY2017 ended 30-09-2017).

At UDC, the press release highlights were motor vehicle lending increasing by $261 million (+28%), commercial lending growing by $51 million (+4%) and equipment dealer lending was up $12 million (+7%). Curiously those categories do not equate to the category loan disclosure made in the UDC annual report. Yes 'Household Lending' was up by $180m but Transport and Storage was actually down $18m. So I would guess that most of the increase in motor vehicle loans were made via retail car yards. The largest dollar increase in any category was $53.5m for 'Agriculture Fishing and Forestry' (up 11%). Curiously UDC chose not to highlight this.

At Heartland, the proportion of Rural Loans continues to increase, now 21.3% of the total up from 19.7% in FY2016, 17.6% in FY2015 and 16.1% in FY2014. Of the current 21.3% of rural loans, 8 percentage points of those relate to dairy (up from 7 percentage points in 2015). So Heartland offers the most financial exposure to 'rural' of any listed entity on the NZX, and it is getting bigger both in real and percentage terms! 'Household' which encompasses Consumer, Reverse Mortgage and Residential Mortgage saw the Consumer subset of loans grow 14% (+$112m), the majority of that growth seeming to be Motor Vehicle loans ( +$72m). However, we then learn that there has not been a consummate rise in earnings due to 'lower earnings rates on Motor Vehicles and Personal Loans'. Reverse mortgage growth has been significant, +12% ( $42.5m) in NZ and +19% ($83.6m ) in Australia. Ironically strong growth in reverse mortgages will continue to put a capital strain on Heartland because it means this subset of the operation remains cash flow negative.

There are early signs that the strategy of doing more business across all sectors 'on line' will be good for Heartland profitability going forwards.

SNOOPY

[dabsman]

Is there any easy way to move my ANZ holdings from NZX to ASX? Would rather not have to pay fees both ways if I can. Reason is I want them to sit with all the other ASX shares - and more liquidity too if I ever need to sell

[BlackPeter]

Is there any easy way to move my ANZ holdings from NZX to ASX? Would rather not have to pay fees both ways if I can. Reason is I want them to sit with all the other ASX shares - and more liquidity too if I ever need to sell

Just talk with your friendly broker. Last time I moved some NZX shares to the ASX it meant to fill out some forms (which the broker will provide) and it did take a handful of days, but it didn't cost money.