GFL - Good news for Geneva Finance

[whatsup]

Yes, it's rather sooner than I was expecting too, I thought next year at the earliest. When and where is the AGM Whatsup?

Last year 1st Sept should be the same as that but you never know it could coincide with the divi payment just to bring smiles all round, hmmmmmm !

[Major von Tempsky]

Worth having another look at in the light of today's announcement and trading :-)

[Snoopy]

Worth having another look at in the light of today's announcement and trading :-)

Shareholder Equity	$20.256m
less Intangibles	$0.180m
less Deferred tax	$1.796m
Total Available Asset Base	$18.280m

Financial Assets at fair value thru P&L	$0.630m
plus Financial Receivables	$54.575m
plus Other Receivables & Deferred Expenses	$0.15m + $1.082m
Total Receivables	$56.437m

So check :

Total Available Asset Base > 0.2x (Total Receivables)

=> $18.280m > 0.2 x $56.437m = $11.287m (true)

=> Geneva passes the Available Equity to Receivable Loan book test.

SNOOPY

[Snoopy]

Worth having another look at in the light of today's announcement and trading :-)

Geneva does not quote EBIT figures directly. So I have calculated it by taking 'Net Profit Before taxation' (EBT) and adding back into that the interest expense.

(EBT + I)/ I

= ($2.739m + $3.372m)/ $3.372m = 1.81 > 1.2 (test standard)

=> Geneva passes the EBIT to interest expense test.

SNOOPY

[Snoopy]

Worth having another look at in the light of today's announcement and trading :-)

Current Financial Assets		Reference
Cash & Cash Equivalents	$8.025m	Balance Sheet FY2016
Financial Assets at fair value thru P&L	$0.630m	Balance Sheet FY2016
Financial Receivables 0-12 months (contractual)	$19.934m	Note 16
Total Current (contractual)	$28.529m	(addition)
Current Financial Liabilities		Reference
Total Current (contractual)	$20.023m	Note 30
Other Cash Source		Reference
Borrowing Headroom	$2.946m	Note 19

Now we can use the above information for the liquidity buffer test:

($28.589m + $2.946m) = $31.535m > 1.1 x $20.023m = $22.025m (true)

=> Geneva passes the liquidity buffer ratio test

SNOOPY

[Snoopy]

Worth having another look at in the light of today's announcement and trading :-)

Underlying Debt		Reference
Debt	$49.372m	Balance Sheet FY2016
less Outstanding Claims Liability	$0.252m	Balance Sheet FY2016
less Unearned Premium Liability	$2.272m	Balance Sheet FY2016
Total Underlying Debt	$46.848m	(addition)
Underlying Assets		Reference
Total Assets	$69.628m	Balance Sheet FY2016
less Finance Receivables	$54.576m	Balance Sheet FY2016
Total Underlying Assets	$15.052m	(addition)

We use the above data to work out the ratio:

(Underlying Debt)/(Underlying Assets) = $46.848m/$15.052m = 311% > 90% (test standard)

Result Geneva emphatically fails the underlying gearing ratio test! (or is there something wrong with the way I have applied this test? - see thread in 'Investment Strategies': 'Gearing ratio: Trading Company vs Bank'

SNOOPY

[Major von Tempsky]

Not quite sure where you are coming from Snoopy. Finance Receivables are still an asset not a liablility and for a Finance Company are always going to be its biggest asset. Perhaps if you quoted the results for the same calculation for half a dozen other NZ Finance Companies we could see whether it is an outlier and whether it matters.
cheers,
The Major

[whatsup]

I note that Geneva goes ex div on 11 Aug 2016 , Im thinking that this would be Geneva's first ever dividend small as it is , are there better things to come, AGM should reveal a master plan ! ?

[Snoopy]

Not quite sure where you are coming from Snoopy. Finance Receivables are still an asset not a liablility and for a Finance Company are always going to be its biggest asset.

Major (and others), I think I should explain why I think looking at the 'Underlying Gearing Ratio' is important.

Suppose you found out that all of the management of Geneva Finance were holograms, and the business was actually run by 'yours truly' out of a doghouse with a silver supper dish as collateral. Now if I was stumping up funds to loan out for fellow mutts to buy dog biscuits, my silver supper dish might be sufficient collateral to inspire confidence: Should I start dishing out 'beyond best by date' bags of dog biscuits (for example). However, if I was stumping up capital to buy cars (as Geneva does), and a couple of my 'finance receivables' (cars) turn out to be dud, then my silver supper dish is not going to go far funding (if only temporarily) replacements. What I am saying is that Geneva needs a certain 'critical mass' in its own right to be seen as a credible lender, if all the loans were called in and repaid. Measuring the 'Underlying Gearing Ratio' is one way to assess if Geneva has a sufficiently funded core.

To measure the 'Underlying Gearing Ratio' I need to take out the finance receivables and, if Geneva was a bank, also take out the underlying bank depositors funds that are propping up these finance receivables. IOW I am trying to get a picture of the 'Geneva Skeleton' should all loans be called in and repaid. But of course Geneva no longer takes depositors funds. Instead they have turned to Westpac and Kiwibank as their source of funds. The question then is, how much of Genva's bank funding is there to support the loan book only? And how much of the funding is there to support the 'Geneva Skeleton'? These are two questions I don't know how to answer right now.

So lets assume all of the bank loans are there to support the 'Geneva Skeleton' (a pessimistic conservative assumption). This means that when I take out the 'finance receivables' to get the 'Total Underlying Geneva Assets', then I do not take out an equivalent supporting amount of capital that has been borrowed from the banks to support these financial receivables, when I calculate 'Total Underlying Geneva Debt'. I am almost certainly incorrect doing my 'Underlying Gearing Ratio' calculation:


'Underlying Gearing Ratio' = 'Total Underlying Geneva Debt'/ 'Total Underlying Geneva Assets'


in this way. Because some of those bank borrowings will have been taken up with the express intention of supporting the 'finance receivables' book. But,

"How to measure it?",

is my question!

Perhaps if you quoted the results for the same calculation for half a dozen other NZ Finance Companies we could see whether it is an outlier and whether it matters.

Good idea. There aren't many finance companies that are listed (release detailed results) and are comparable. But I am looking at the finance side of Turners TNR (was Dorchester) as we speak.

SNOOPY

[Snoopy]

I think looking at the 'Underlying Gearing Ratio' is important.

Geneva needs a certain 'critical mass' in its own right to be seen as a credible lender, if all the loans were called in and repaid. Measuring the 'Underlying Gearing Ratio' is one way to assess if Geneva has a sufficiently funded core.

To measure the 'Underlying Gearing Ratio' I need to take out the finance receivables and, if Geneva was a bank, also take out the underlying bank depositors funds that are propping up these finance receivables. IOW I am trying to get a picture of the 'Geneva Skeleton' should all loans be called in and repaid. But of course Geneva no longer takes depositors funds. Instead they have turned to Westpac and Kiwibank as their source of funds. The question then is, how much of Genva's bank funding is there to support the loan book only? And how much of the funding is there to support the 'Geneva Skeleton'? These are two questions I don't know how to answer right now.


'Underlying Gearing Ratio' = 'Total Underlying Geneva Debt'/ 'Total Underlying Geneva Assets'


Some of those bank borrowings will have been taken up with the express intention of supporting the 'finance receivables' book. But,

"How to measure it?",

is my question!

After some thought, I think I have been looking at this issue of gearing from the wrong angle.

Geneva is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.

The table below has taken items from the balance sheet (marked (1)), and used those numbers to generate other numbers in the prescribed order ( (2),(3),(4),(5) )

	Assets		Liabilities		Shareholder Equity
Not Underlying Finance	$15.052m (2)	-	$13.547m (3)	=	$1.505m (5)
Underlying Finance	$54.576m (1)	-	$35.825m (4)	=	$18.751m (5)
Balance Sheet Total Finance	$69.628m (1)	-	$49.372m (1)	=	$20.256m (1)

Calculation (2) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:

(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9

From this, we can work out that the Non-Risk Liabilities must be no more than:

(Non-Risk Assets) x 0.9 = $15.052m x 0.9 = $13.547m (which is answer 3 above).

Simple subtraction and addition is then used to work out the rest of the numbers in the table.

So what's the point of this so far?

By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for Geneva. This is done by looking at the assets and liabilities left outside the core.

Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $35.825m/$54.576m
= 65.6%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities?

SNOOPY