Remember, as per previous discussion on this very thread, that the $14M - $15M guidance for 2016 is Net Profit Before Tax.
It looks highly likely that by FY2016 they will have used all their tax losses up.
Best Wishes
Paper Tiger
Paper Tiger, Percy,Noodles and Snoopy - Thank you for the replies Gentlemen.
Brain
This is incorrect. Dorchester have stated that will require further a capital raising. Check out the CEO's address from the 2013 AGM
"That balance sheet will have the capacity to debt fund significant, but not all of the investment in acquisitions we would hope to make. However, we are conscious of
further dilution for all shareholders and our modelling shows relatively modest further
capital raising involving the issue of less than 100 million additional shares.
"
I don't think Heartland have made any such statements.
From the 17th March press release:
"We expect Oxford Finance to contribute $3 million of earnings before interest and tax in the first year to 31 March 2015. Additional synergies will arise for Dorchester in areas such as insurance, IT and compliance costs although we have not factored these in to our acquisition pricing or forecast returns."
"The final purchase price will be between $11.3 million and $12.3 million depending on earnings of the business for the 12 months to 31 March 2015. The consideration for the acquisition will be paid in cash which will be funded from retained earnings and the proceeds of last year’s capital raising."
There is enough info in that press release to work out a 'P / EBIT' ratio but not a P/E ratio.
So how to work out the P/E ratio of the Oxford Finance acquisition? From my post 951, I see an underlying DPC debt of $24.184m and underlying assets of $78.747m at balance date. If the Oxford purchase price ends up being $12.3m, then the underlying debt goes up to $36.484m. A 50% increase in debt implies a 50% rise in the interest bill. Last years interest expense was $2.188m. So we are looking at an extra $1.094m in interest to fund the Oxford purchase. DPC is not forecasting paying any tax in FY2015, so the 'T' in EBIT is zero. Bringing all that together, we can now calculate the implied 'PE' ratio of the Oxford purchase:
$12.3m / ($3m - $1.094m) = 6.5
That looks cheap. But what about any underlying debt that Oxford has? Isn't that acquired by DPC too? Unfortunately we aren't told what underlying debt Oxford has. So I don't think we have sufficient information to calculate a PE acquisition figure. Would love to be proved wrong on this though!
SNOOPY
I agree that on a superficial comparative basis DPC looks expensive. So is there something I have missed that could justify the high price? Take a look at the divisional break down of the FY2014 result, and look at the Finance division.
EBIT was $3,360m. Of course this doesn't take into account any 'corporate costs' (total -$3.879m) . I like to allocate these back into any divisional result on a 'fair allocation basis'. But how to do that?
As a first step I would adjust the corporate costs to remove the 'present value of optional convertible notes interest installments'. The convertible notes no longer exist so this item will not appear as a corporate cost in future years. I would also add back $2.179m in interest expense. My definition of 'Operating Profit' = EBIT. So I think it is very unhelpful of DPC to declare an 'operating profit' with interest expense already taken off. Making those two adjustments to 'Corporate Costs' I get a total corporate cost figure of just -$31,000.
DPC has given us a depreciation and amortization charge for each division. I propose this is a measure of how hard they are working their assets in each division in gross terms. So I would allocate 'Corporate Costs' amongst each division in proportion to depreciation and amoritization expense. I calculate a finance division allocation of corporate costs to be $10,140 on this basis.
So the FY2014 EBIT for the finance division is $3.360m - $0.01014m = $3.350m
We also are told the segment assets for the finance division total $37,953m at years end.
So EBIT /Segment Assets = $3.35m / $37,953m = 8.83%
Now compare this with the equivalent TUA finance division result:
TUAF FY2013 ($1.861m-$1.151m) / ($10.684m + $14.916m) = 2.8%
and you can see that Dorchester makes three times as much 'operating profit' as TUA does for doing essentially the same job on a similar sized loan book. Maybe the boys at DPC really do deserve that sharemarket investment premium?
SNOOPY
I think I can offer some numbers on the earnings potential of the debt collection division. The divisional operating profit is shown as $3,501m for FY2014. Just like the finance division that I have just analysed, I believe you have to take off a share of corporate costs to get a true EBIT picture. For the debt collection division, this works out to be $11,310. so
EBIT (debt collection) = $3.501m - $0.01131m = $3,490m
We are told segment assets are $13,615m
So EBIT / Segment Assets = $3,490m / $13,615m = 25.6%
That is an astonishing rate of return, three times better than their own well performed finance business when measured with the same measuring stick. Not too far short of that 37% that Percy, perhaps only slightly optimistically, calculated. More evidence that the premium price that DPC trades at with respect to other finance companies is justified?
SNOOPY
Thanks Snoopy.I have been a very naughty boy.I brought quiet a few more HNZ this morning.
I am watching DPC with the view of buying a small parcel,so I can get the printed copy of the annual report,to help me understand them. I seem to be able to "focus my attention" when I actually own some of a company's shares.At present DPC looks a bit weak on the charts,however I will most probably buy when they look a bit healthier.
Am well underwater with SCT.!!! lol.
Snoopy,
You are not comparing apples with apples.
1. DPC puts there interest costs at the corporate level. TUA at the segment level. So to compare, you need to take out the 2179 in interest costs
2. You have taken insurance profit from the TUA figure, but not external revenue from the DPC figure. So to compare, you need to take 1310 off the figure
We are left with a profit of 3350 - 2179 -1310= small loss!
So TUA have a better finance division.
noodles
So much for IFRS rules making all figures easy to compare :-).
I did add back in the $2.179m in interest costs though ( I needed to add this back to get Earnings before Interest and Tax) , and I also added back in the $1.669m one off charge concerning the wind up of the convertible notes.
So the "Corporate and Other" adjusted segment result worked out to be not 3.879m but:
-$3.879m -(-2.179m - $1.669m ) = -$0.031m, or just $31,000.
I did allocate a fraction of those costs to the finance division. But because it worked out to such a small number in context it made little difference to my calculated result when compared with the alternative of just using the $3.360m for the finance division result alone.
Yes that is correct. That is because insurance is part of the TUA finance division, and I am interested in the underlying profitability of the Turners loan book, excluding insurance.Quote:
2. You have taken insurance profit from the TUA figure, ...
I left the other external revenue in to the DPC calculation, because it was still "finance income" and part of the "finance division". However because there are no notes released with the DPC accounts, I don't know what this 'other external revenue' is. I will be receptive to removing it if you can supply more information as to why I should do so.Quote:
but not external revenue from the DPC figure.
Debatable?Quote:
So to compare, you need to take 1310 off the figure
SNOOPY
I did not include the one off cost as it is "one off" in nature.
All I did was take the segment result(EBIT)(see page7 of the report) and take off the interest. I applied all the interest to that division as it was only division that requires the capital. On reflection, maybe insurance requires some capital. Not sure how to split that out. In any case, to do a like for like with turners, you must do EBT, not EBIT.
noodles
A very good interesting article on Paul Byrnes and Dorchester in this morning's Sunday Star-Times.
Thanks for posting Percy, would not have read it if you did not inform it was there. Good article in deed.
AFAIK there is no 'correct' way to allocate out corporate costs between divisions. Because this is a service based company, I decided to allocate the costs in proportion to the declared 'depreciation and amortization' declared for each division. I judged this to be a measure of how hard each division is working its assets. In effect, the busier the people (judged by depreciation of office fittings and computers and amortisation of software), the more 'head office costs' are allocated to those people (that division).
Putting that into numbers I allocated corporate costs at DPC for FY2014 this way: 32.70% to finance, 30.81% to insurance, 16.94% to collection services
I think an insurance company does indeed require capital behind it to keep running, as does a debt collection service.
I looked at the TUA segment results 'operating profit' - normally EBIT (AR2013 p31), saw the interest figures sitting below that and assumed, they were yet to be deducted. However a cross comparison of total operating profit with the income statement (AR2013 p16) shows that the interest has already been deducted. You are quite correct Noodles that TUA are declaring their 'segment results' as EBT, not EBIT. I shall make the appropriate correction.Quote:
In any case, to do a like for like with turners, you must do EBT, not EBIT.
SNOOPY
Despite the seemingly time shifted comparison, I am largely covering the same months of the year, because of the different balance dates of TUA (31st December) and DPC (31st March).
Noodles has pointed out that for TUA I used EBT and for DPC I used EBIT, so the above comparison is not fair. To fix this I will add back the interest paid into the TUA result.
So the FY2014 EBIT for the DPC finance division is $3.360m - $0.01014m = $3.350m
We also are told the segment assets for the finance division total $37,953m at years end.
So EBIT /Segment Assets = $3.35m / $37,953m = 8.83%
Now compare this with the equivalent TUA finance division result:
TUAF FY2013 ($1.861m-$1.151m+$1.926m) / ($10.684m + $14.916m) = 10.3%
and you can see that TUA makes an 'operating profit' which is one and a half basis points above the earnings of DPC for doing essentially the same job on a similar sized loan book. I am happy that the result was closer than I thought, because is such similar competitive markets, it would make sense for the two operating margins to be wildly different.
If DPC really do deserve that sharemarket investment premium, I will now argue it is not because of their prowess with the loan book.
SNOOPY
I have looked at the past annual report and interim report to get an idea of what the .other income' $1.310m might be. The website just says Dorchester does "personal loans" and "business loans" under the FAQs goes on to say:
"The security will usually be a motor vehicle, boat or a registered mortgage or an ‘agreement to mortgage’, supported by a caveat lodged over the title of your property if you own a house."
The interim report says 70% of new loans are on motor vehicles. The legacy 'Senate Portflio' also motor vehicles has been fully provided for, indicating it is a basket case?
But there is no real clue as to what that other finance income might be.
SNOOPY
Interesting to see a single buyer wanting a million shares at 22c. Havent seen that for a while, and not many on offer. Would be interesting to know the motivation of someone wanting to invest $220,000 in DPC today.
IMO 28-30c should be a minimum for that sort of quantity.
I'm wondering why someone would even consider baling out at 22c.
Disc. Hold quite a few so Im biased
I do have other things to do, but I see that bid for a Mil. shares is up 1/2 a cent to 22.5. Still dreaming IMO :-)
TAKEOVER: DPC: Dorchester enters Lock Up Agreement ahead of Takeover Offer
DPC
28/07/2014 09:55
TAKEOVER
REL: 0955 HRS Dorchester Pacific Limited
TAKEOVER: DPC: Dorchester enters Lock Up Agreement ahead of Takeover Offer
28 July 2014
Company Announcement
DORCHESTER ENTERS LOCK UP AGREEMENT AHEAD OF TAKEOVER OFFER FOR TURNERS
AUCTIONS
Dorchester Pacific Limited (NZX:DPC) today announced it has entered into a
Lock Up Agreement with Bartel Holdings Limited (Bartel), a 20.8% shareholder
in Turners Auctions Limited (Turners). Bartel has agreed to accept, in
respect of its Turners ordinary shares, a takeover offer Dorchester intends
to make for all the ordinary shares in Turners it does not already hold.
Dorchester currently owns 19.85% of the ordinary shares in Turners.
Dorchester and Bartel between them hold 40.65%.
Dorchester advises that it intends to make a full takeover offer for 100% of
Turners' equity securities under Rule 8 of the Takeovers Code, under which
Dorchester will offer Turners' shareholders;
o cash consideration of $3.00 per Turners ordinary share; or
o 2 year 9% p.a. interest bearing Convertible Notes to be issued by
Dorchester with an option to convert to Dorchester ordinary shares; or
o Dorchester ordinary shares (with a guaranteed allocation of up to 60% of
the consideration due to accepting Turners shareholders, pro rata
thereafter); or
o any combination of cash, Convertible Notes or Dorchester ordinary shares,
subject to the limitations on Dorchester ordinary shares referred to above.
In addition, Dorchester will be seeking payment by Turners of a fully-imputed
special dividend of $0.15 per Turners share to existing shareholders, once
acceptances are received from Turners shareholders giving Dorchester an
aggregate holding in Turners in excess of 50%.
Bartel has agreed to accept a combination of 60% Dorchester ordinary shares
and 40% Convertible Notes as consideration for its Turners shares,
conditional on the takeover proceeding.
The takeover offer is not conditional on Dorchester achieving a particular
threshold of acceptances, other than achieving at least 50.1% control as
required by the Takeovers Code.
Dorchester CEO and Executive Director, Paul Byrnes, said funding for the
acquisition will be a combination of a share placement, the issue of
Convertible Notes and some bank funding.
"We anticipate raising between $25 million and $27.5 million at $0.25 per
share through the issue of Dorchester shares to Turners shareholders,
including Bartel, and a placement. We also expect to issue around $15
million of Convertible Notes including to Bartel. Final numbers will of
course depend on the level of acceptances and the combination of shares,
Convertible Notes and cash options taken up by Turners shareholders.
"Our major shareholders have indicated an interest in participating in both
the share placement and the Convertible Notes issue. We are also considering
how we can give all Dorchester shareholders the opportunity to participate in
the placement through a Share Purchase Plan. This may leave $5 million to
$7.5 million to be placed with qualifying investors in a market placement
although we will have bank funding in place to more than cover this in any
event."
It is expected that a formal Takeover Notice will be issued during the month
of August. At that time the date of Dorchester's Annual Meeting of
shareholders will be set. Resolutions in relation to the takeover offer will
be considered at that meeting.
Commenting on the rationale for the acquisition, Mr Byrnes said:
"There is a natural alignment and synergy between Dorchester and Turners
Auctions, which we talked about at the time of our investment in Turners,
last April. Seventy percent of our finance lending is for motor vehicles and
our insurance business has a focus on motor vehicle related insurance
products. We have also signaled our interest in participating in the
origination or 'front end' of an end-to-end financial services business.
And, at board level, we have been very supportive of Turners' multi-channel
strategy.
"With Dorchester's shareholder funds increasing to over $100 million
following the share placement - compared to Turners current shareholders
funds of around $18 million - we believe we can add significant 'horse power'
to grow the business in a much shorter time frame than might currently be
possible. We believe the takeover will be particularly positive for Turners'
existing customers and staff, as it will create many new opportunities.
"With respect to Turners shareholders, we think the effective consideration
of $3.15 per share (including the $0.15 Turners special dividend) is a pretty
good outcome given the market price of around $1.80 per share 15 months ago
when we joined the register. Of course we are hoping that Turners
shareholders will come to the same view as Bartel has, in not only assessing
the takeover price as attractive, but also seeing value in the opportunity to
participate in the growth and profit momentum of the enlarged business."
Last Month Dorchester advised the market of its profit guidance for its
existing businesses of $10 million - $11 million for the current financial
year, with this increasing to around $15 million for the year to 31 March
2016.
"If the takeover proceeds we would expect the Dorchester group profit before
tax in the 2016 year to be in the $20 million to $25 million range, depending
on our ultimate shareholding in Turners", said Mr Byrnes.
Dorchester Chairman, Grant Baker, said that while the takeover offer may
appear to be a bold move for Dorchester, the acquisition of a controlling
stake in Turners is entirely consistent with Dorchester's well signaled M&A
criteria and profit strategy.
"It perfectly fits our strategic plan in that it's an industry we understand
and offers scale and sustainable earnings. We believe additional synergies
will arise from a more significant investment position."
Mr Baker said the acquisition will be earnings per share accretive for
Dorchester and that funding is quite manageable.
"Dorchester's balance sheet will still remain relatively conservative, with
some headroom for pursuing further opportunities."
ENDS
For further information please contact:
Paul Byrnes
CEO/Deputy Chairman
Dorchester Pacific Limited
DDI: (09) 308 4988
Mobile: 021 644 441
Grant Baker
Chairman
Dorchester Pacific Limited
Mobile: 021 729 800
Karyn Arkell
Karyn Arkell & Associates
Mobile 027 475 3511
About Dorchester Pacific (Dorchester)
Dorchester is a financial services company with four operating entities,
Dorchester Finance, Oxford Finance, DPL Insurance and EC Credit. EC Credit
was acquired in November 2012 and Oxford Finance was acquired in April 2014.
Dorchester Finance provides secured lending to consumers (70%) and small and
medium businesses (SME's) (30%). The value of the loan book is approximately
$40 million with 70% of total lending on private and commercial motor
vehicles. The business operates out of Dorchester's offices in the Auckland
CBD with its customer strength in the Auckland, South Auckland and Hamilton
regions.
Oxford Finance provides secured lending mostly to consumers through a mix of
channels including motor vehicle dealers, finance brokers, smaller finance
companies and direct lending. The value of the book is approximately $50
million with 75% of loans being motor vehicle financing. The business is
based in Levin with a strong presence in the Wellington, Wairapapa, Taranaki,
Hawkes Bay, Waikato and Bay of Plenty areas. Oxford Finance was acquired by
Dorchester on 1 April 2014 for a (cash) purchase price of between $11.3
million and $12.3 million depending on earnings of the business for the 12
months to 31 March 2015. A profit contribution of $3 million earnings before
interest and tax is forecast for that period.
DPL Insurance is an underwriter and distributor of insurance products under
'Dorchester Life' and 'Mainstream' brands. Dorchester Life products include
Easylife and Funeral Plan. The major growth focus is on 'Mainstream' motor
vehicle related insurance products including private motor vehicle insurance,
motor vehicle breakdown insurance, loan repayment insurance and GAP
insurance. DPL Insurance has a financial strength rating of B+ from credit
rating agency A.M. Best.
EC Credit provides debt recovery and credit management services in New
Zealand and Australia. Debt recovery clients include banks, institutional
and corporate clients and SME businesses, with collections on a contingency
basis. EC Credit also sells terms of trade, credit reporting and legal
services to SME customers in New Zealand and Australia. The company is
headquartered in Napier with offices in Australian states, and employs
approximately 150 staff and agents.
EC Credit was acquired in November 2012 for a total consideration in cash and
shares of approximately $18 million and contributes an earnings before
interest or tax in excess of $4 million.
Dorchester acquired a stake of just under 20% in NZX listed Turners Auctions
Limited (Turners) in April 2013. Turners is a market leader in the second
hand car, truck and machinery market in New Zealand with three revenue
streams, Fleet (purchase and sale of used vehicles sourced from New Zealand
and Japan), Finance (lending on motor vehicles with insurance product
offerings) and Auctions (sales of vehicles and machinery on behalf of vendors
including lease companies, government, finance companies and motor vehicle
dealers).
The Dorchester Group reported a profit after tax of $8.2 million for the year
to 31 March 2014. In June 2014 the company provided profit guidance of $10
million - $11 million for the financial year to 31 March 2015 with this
increasing to around $15 million for the year to 31 March 2016. These
forecasts include a full contribution from Oxford Finance but no contribution
from further merger and acquisition activity.
End CA:00253161 For:DPC Type:TAKEOVER Time:2014-07-28 09:55:33
I was very impressed that DPC tied up the Bartel Holdings shares.
I brought in this afternoon at 23.5cents.
Prospectus for the turners takeover bonds is out.
They have no intention to list the so I suppose this belongs here rather than the NZDX section.
The bonds are 2 year 9% with quarterly payments and a conversion option.
I'm fairly keen to apply for some but if anyone with insight in to the business/default risk wants to chime in it would be greatly appreciated.
and yes I'm aware that given the small size of the issue and that turners/Dorchester shareholders get priority odds are I won't get any anyway.
https://www.nzx.com/files/attachments/199326.pdf
Well today's market update had the "smell of money" about it to me.Doubled my holding at 25cents this afternoon.
I agree Percy. It is a continuing pattern of upgrades at DPC. Some more colour is given in the RNZ interview. http://www.radionz.co.nz/national/pr...nings-guidance
But of more interest to me was the details about how the acquisition will be funded. From this I can calculate a normalised pe for FY16 (year ending 31 march 2016)
First some assumptions:
1. DPC get 100% ownership
2. All Convertable notes are converted
Additional Capital raised based on 100% ownership $48mill @25c per share. I included the convertible notes in my eps calculcation. I know this is not technically correct, but they will probably convert at a later date. In any, case, the number of shares on issue should reflect this.
The number of new shares issued = 48Mill/.25c= 192mill shares. Add this to the existing shares and we get 685mill shares
Now the profit. DPC stated here that NPBT for FY16 with 100% ownership is $25mil
https://www.nzx.com/companies/DPC/announcements/253161
While they won't pay full tax that year, I'm going to assume they do to get a true reflection of underlying profit.
So NPAT = 25*(1-.28)= $18mill
This gives me an eps of 2.62c
And a pe of 9.53 (at current share price of .25c)
For me a pe< 10 in a growth company is rare.
DISC: Holding
EPS 2.62 cents.
Thanks for working out the fundamentals.
I very much doubt such a growth company, with increasing capacity to pay higher dividends, will stay on a projected PE of under 10 for long.
All the "one offs" etc, will certainly strengthen the balance sheet.
Feel as though we are "well positioned."
Awesome noodles ; i really appreciate ( and i know many lurkers will too:)you doing this research and doing some figs; thanks JT.
QUOTE=noodles;503711]I agree Percy. It is a continuing pattern of upgrades at DPC. Some more colour is given in the RNZ interview. http://www.radionz.co.nz/national/pr...nings-guidance
But of more interest to me was the details about how the acquisition will be funded. From this I can calculate a normalised pe for FY16 (year ending 31 march 2016)
First some assumptions:
1. DPC get 100% ownership
2. All Convertable notes are converted
Additional Capital raised based on 100% ownership $38mill @25c per share. I included the convertible notes in my eps calculcation. I know this is not technically correct, but they will probably convert at a later date. In any, case, the number of shares on issue should reflect this.
The number of new shares issued = 48Mill/.25c= 152mill shares. Add this to the existing shares and we get 685mill shares
Now the profit. DPC stated here that NPBT for FY16 with 100% ownership is $25mil
https://www.nzx.com/companies/DPC/announcements/253161
While they won't pay full tax that year, I'm going to assume they do to get a true reflection of underlying profit.
So NPAT = 25*(1-.28)= $18mill
This gives me an eps of 2.62c
And a pe of 9.53 (at current share price of .25c)
For me a pe< 10 in a growth company is rare.
DISC: Holding[/QUOTE]
On the assumption that $25M PBT represents 100% ownership of TUA for the 2015-6 FY then:
there will be 615M shares and $18M of bonds which paid out $1M62 of interest.
That would equate to a tax normalised NPAT of 2.929cps. ($18M/615M)
Convert the $18M of bonds to 72M more shares (is that right?) and you save the $1M62 interest.
That would equate to a tax normalised NPAT of 2.791cps. ($19M17/687M)
Remember that this is based on estimates of future profits and actually results will be different.
Best Wishes
Paper Tiger
Worth a listen. Grant talks briefly about why they are buying Turners
http://podcast.radionz.co.nz/busines...olders-048.mp3
Profit upgrade for FY2015 (from $10m - $11m) to $11.5m, yet profit guidance for FY2016 remains the same ($15m).
However it isn't clear why the profit has been upgraded. Oxford Finance is mentioned (are they doing better than expected?). TUA is mentioned (are DPC forecasting more synergy gains? Or is TUA just expected to do better than expected?) If the latter, why not just stay invested in TUA? The question for TUA shareholders is will Dorchester overall grow faster than TUA alone? I would argue that Turners as they transform to NZs first corporate car dealer, will grow faster on average. This unspecified profit upgrade by Dorchester could be a cynical ploy to make TUA shareholders think they are missing out, when staying put could yet prove the best way.
SNOOPY
Great interview
http://www.radionz.co.nz/national/pr...-future-at-agm
I note that at the AGM, the food was boring and cheap. Just what you want from a company that is focused on profits.
Were you expecting a banquet? I was more than happy with club sandwiches, mini- pies and cream and jam on the scones. Perhaps you are too fussy, or were too late to the scrum. If your really looking for fine dining, you should of attended the Snk meeting, with a large assortment of canapés and a band playing in the background.
The 'simplified disclosure prospectus' put out by Dorchester to try and entice some TUA shareholders on board provides some detials on Dorchester's operations that AFAIK have not been published before. Of particular interest, from p23, is the information provided on Dorchester's Reverse Annuity Mortgage business, or RAMS for short.
FY2013 FY2014 Total Revenue $0.248m $0.554m Expenses -$0.188m -$0.379m Net Profit after Tax $0.060m $0.175m Total assets (A) $6.628m $5.430m Total liabilities (B) -$6.569m -$5.196m Shareholders Equity (A-B) $0.059m $0.234m Borrowings -$5.252m -$3.851m
What strikes me as counterintuitive is that total assets being managed are down by 18% between FY2013 and FY2014. Yet net profit has grown by 290% over the same period. Explanation?
Whatever the reason, dividing total liabilities by borrowings gives:
FY2013: $6.569m/$5.242m = 1.25
FY2014: $5.196m/$3.851m= 1.34
So as a proportion of liabilities, as well as absolutely, borrowings are lower moving from FY2013 to FY2014.
What does surprise me is the very low shareholders equity needed to support the assets on the books:
FY2013: $0.059m/$6.628m = 0.89%
FY2014: $0.234m/$5.430m= 4.3%
Anyone offer an explanation as to how they can get away with such thin capitalisation?
SNOOPY
Perhaps that would be easier once the TUA takeover offer closes and the state of the DPC balance sheet post takeover is revealed. Too many variables floating around to give a sensible answer before then IMO.
I am firming up on the idea of taking the DPC 9% bonds myself. That will give the head share a chance to settle down and I can decide whether to join the DPC share register in two years time, when the bonds mature.
SNOOPY
Snoopy,
At the AGM, I think I can remember Grant Baker saying (someone questioned them on the RAMS and how they were doing) that the RAMS were something that they were winding down and that this was a leftover from pre-2008. So that is why the total assets may be diminishing yet profit holding? (ie they have not written a new RAM in quite a while)
Paul Byrnes confirmed this when I spoke to him.
Now I get a bit mixed up here,but DPC's insurance business uses part of the RAMs as capital requirements.The insurance business also writes policies for RAMs,and will continue to offer policies in this area.[very profitable]
DPC see their immediate future in motor vehicle,machinery, equipment finance,and insurance based around these areas.
The TUA acquisition opens up further distribution channels in this area for DPC.
I think the bonds are a decent option. However, you may have to pay up to 30c for your DPC shares in 2 years time versus 25c now. While you would get 9% yield, you wouldn't get the DPC dividend. The lack of liquidity is a bit of an issue for me as well.
I'm thinking of taking half cash and half DPC shares. The TUA acquisition is a game changer.
Noodles, the bonds pay 9% which by all accounts is more than the DPC dividend. If the DPC share price is in excess of 30 cents in 2 years time you are well in the money. If not, you still get the DPC shares at a 5% discount to the market value at the time. To me it is a no lose scenario. (sometimes also called win win)
OK, I will attempt to answer my own question.
The reverse equity loan (REL) business is very different from other kinds of lending businesses. When people take out a reverse equity loan, they do so retaining ownership of their property. But this isn't how the bank lending them the money sees it. The bank takes the money that they leant on the REL, then turns that 'financial receivable' into an asset on the bank's balance sheet. Our 'owners' loan agreement with the bank means that the bank has effectively taken over the ownership of a substantial part of the property, despite the 'owner' still being listed as 'the person who took out the loan' on the property title.
Even better than this (from the bank's perspective) is that the value of their asset (finance receivable) keeps going up as the interest bill keeps rising. Short of being unable to recover the value of the property when it is finally sold, the bank simply cannot lose on this deal. The bank's asset (finance receivable) can only increase in value over time. So you can run an REL business on hardly any capital because that capital will never be called upon to bail out the loan.
Capital 'never be called upon to bail out the loan'? That sounds too good to be true, and it is. But by limiting the amount of capital loaned on a property to say 50% of its market value (I made that figure up) and using the expected life of the people who took out the loan as a calculation input figure the bank can virtually eliminate the possibility of the loan going bad. Any property slump can be ridden out by just making the residual balance required to be retained by the property owner high enough. You would have to be a very incompetant banker to lose on such a deal.
SNOOPY
Thanks for this. There was certainly no mention of RAMS being in a wind up mode in the bond offer prospectus. I wonder why they are winding RAMS down though? Return on equity is fantastic:
Return on Equity FY2014: $0.175m/$0.234m = 74.8%
Wow! No wonder the likes of Heartland see their average ROE rising going forwards with the acquisition of the Sentinal REL business!
SNOOPY
The more people take up the bonds, the higher the debt servicing cost is for DPC. Hence the lower the profit for DPC, and the less likely the DPC share price is to rise. And the more favourable the bond to share conversion price will be in two years time. If you are going for the bonds, apply for all you can I reckon! Milk those DPC shareholders for all you can!
The bond prospectus sends mixed messages on this point. They state in black and white there is no intention to list the bonds and so holders should be prepared to hold for two years. But then on page 20 there is this statement:Quote:
The lack of liquidity is a bit of an issue for me as well.
"ii/ The price at which the bondholders are able to sell their bonds is lower than the amount originally paid owing to changes in market interest rates or the perceived credit worthiness of the bonds."
Bondholders holding until maturity will receive the fixed predeclared interest rate of 9%. So the above statement only has meaning if a market for the bonds, prior to maturity, exists.
I think a secondary market for the bonds will emerge, because they are such a desirable investment. I note that DPC don't rule out a secondary market for the bonds, even if they have no plans to set one up. My pick is that once the bonds are issued a secondary market will emerge. The fact that DPC are not being definitive on the bond secondary market is because DPC would rather shareholders accepted shares, not bonds. Don't be scared off the bonds because of perceived liquidity limitations folks.
I am leaning towards retaining half of my TUA shares, and converting the other half to DPC bonds. I am waiting on the independent advisors report before I finally decide though.Quote:
I'm thinking of taking half cash and half DPC shares. The TUA acquisition is a game changer.
SNOOPY
Yes the insurance side of the business has definitely been regrouped Percy. I would be very pleased to see the reverse equity mortgage business within DPC still alive. But is there any hard evidence of this? It seems strange DPC should separate out the RAMs as a legacy business, then continue to offer RAMs under another umbrella.
SNOOPY
Keep in mind the downside protection offered by the bonds too. If DPC has a bad couple of years and the share price goes down to 20c, we bondholders will be buying our DPC shares at only 19c in two years time. Plus we will have had the benefit of 9% paid on our capital in the interim.
I don't predict DPC will get into any real trouble though. Look on page 40 of the bond prospectus.
----
"Nevertheless there are financial covenants on (Dorchester) bank facilities"
<snip>
"The total tangible asset equity ratio shall be greater than or equal to 20% for the period up to 30th September 2015, and 25% thereafter (because they will need more cash on hand to repay bondholders who want out a few months later)."
-----
This is exactly the kind of capital adequacy test I have been applying to financial companies for years. Those on the Heartland thread thought I was being unrealistic in asking for so much capital to be on the books. Yet here is Dorchester looking to satisfy my requirement without fuss.
Don't get me wrong, I think Heartland is an OK investment. But Heartland is less well capitalised than DPC and IMO has lower growth prospects. Why bother investing in Heartland, when an alternative investment in DPC looks so much better?
SNOOPY
I'd like know you rate the management of DPC compared to HNZ.
I don't know much about either board - seems HNZ has an ex-senior Westpac exec running it, and, DPC is chaired by a venture capitalist - ex Ecoya, 42 Below, Moa.
Look at how the Ecoya, 42 Below and Moa deals were structured - whose money was at risk?
Whose money is at risk in the DPC bond offer?
There will be another crash some time. They seem to come around every 10 years or so. The last one was in 2008. How would this company do in a crash?
FWIW I sold my TUA on-market at a small discount to the net offer price two weeks ago - for a sure return.
I respect the boards of both HNZ and DPC. Both companies have had large capital raisings since the GFC (in fact HNZ was created by a large capital raising out of PGC). Since 2011 I don't think either board has put a foot wrong. HNZ I think has perhaps faced the most difficult transition as they unwound their difficult property portfolio. But as of FY2014, I would say both companies are on track.
I guess DPC has a residual cloud of doubt to overcome, as a survivor of the NZ financial sector meltdown. But it is transforming into quite a different business compared to what was there before. Maybe those entrepreneurial people on the DPC board are helping here?
Heartland has a BBB credit rating which, on average, means it might fail within 30 years. Or looked at another way it has about a one in five chance of failing in the next GFC.Quote:
Whose money is at risk in the DPC bond offer?
There will be another crash some time. They seem to come around every 10 years or so. The last one was in 2008. How would this company do in a crash?
Dorchester has no rating because it no longer takes public deposits. The insurance arm of Dorchester has a rating of B+. So if Dorchester did have a rating it would probably be lower than Heartland. To make up for this Dorchester has a higher equity ratio though.
The other thing I like about Dorchester is the bad debt recovery business it does for the major banks. Perversely the more bad debts start to rack up at the major banks, the better for Dorchester's debt recovery business. So Dorchester has a natural hedge in their business model if the economy starts to go bad.
As for whose money is at risk, I have niggling doubts about all the second tier finance companies. This is why I favour converting some of my TUA shares into DPC bonds. As a bondholder I can watch from outside the tent for a couple of years. If I don't like how DPC is progressing then I will redeem my bonds for cash. If I like how DPC is going I can convert to shares in two years. My DPC bonds will be paid back before shareholders capital if DPC does run into trouble. But as you have assessed Bunter, the bonds are not a totally risk free investment.
And no doubt you made a tidy profit and have since reinvested. Me, I will wait until that independent TUA valuation report comes out before I make my final decision.Quote:
FWIW I sold my TUA on-market at a small discount to the net offer price two weeks ago - for a sure return.
SNOOPY
The DPC takeover of TUA has now reached the 90% mark and can now move to 100%.
Congratulations to Paul Byrnes for driving the takeover so well.No hic-ups.
The distribution channels secured for Dorchester with this takeover will secure a bright future for DPC.
The two businesses are now totally aligned.
The above quote referenced the following press release:
--------
SSH: DPC: DPC - The Bakery acquires cornerstone stake in Dorchester
31 August 2009
The Bakery acquires cornerstone stake in Dorchester
The Business Bakery LP (The Bakery) announced today that it has purchased 7,117,226 shares in Dorchester Pacific Limited (Dorchester) for $400,000 or 5.6 cents per share. The purchase price is a discount of 18% against the volume weighted average market price over the last 30 business days and represents 19.47% of the Dorchester shares on issue. The shares were purchased from Auguste Holdings Limited.
The Bakery believes that while Dorchester has had some challenges, which the market is well aware of, there are also significant opportunities in the financial services sector which Dorchester, if well capitalised, would be able to take advantage of.
The Bakery will seek to work with the Dorchester board and shareholders in order to improve the future prospects of the company.
The Bakery is a limited liability partnership founded and managed by Geoff Ross, Grant Baker and Stephen Sinclair. As well as Dorchester, The Bakery has investments in The Hyperfactory International Limited, Foundry Asset Management Limited and Ecoya Pty Limited.
----
Five years on, I think we can say thst 'The Bakery's' move into DPC was astute. Perhaps then we should also pay attention to today's NZX announcement from DPC:
------
Summary of substantial holding to which disclosure relates
Class of listed voting securities: ordinary shares in Dorchester Pacific
Limited (DPC)
Summary for The Business Bakery L.P.
For this disclosure,--
(a) total number held in class: 84,617,226
(b) total in class: 616,463,185
(c) total percentage held in class: 13.726%
For last disclosure,--
(a) total number held in class: 84,617,226
(b) total in class: 479,342,632
(c) total percentage held in class: 17.653%
-----
The number of shares have not changed so the Bakery are not selling down. But neither are they putting any more money into the company via the recent capital raising by 'committed shareholders' even though some say 25c is a bargain. So perhaps the Bakery is not as 'committed' to financing the further expansion of DPC as they were?
SNOOPY
Weetbix still a very popular breakfast cereal. I know that because the number of Dorchester shares continue to increase. We are now up to 624 million. There are also 23.147m bonds on issue. Let's say they convert in just under two years time at 33c per share. That means there are in effect 693m DPC shares out there in the future. Let's round things up and call it 700m for ease of calculation in the future.
Meanwhile Bartel Holdings appear on the share register as a substantial holder with just over 7% of the company.
The share price seems very strong at the moment, up 3.8% today to 27.5c. I woudl say mimicing that other listed finance company Heartland. But I think in percentage terms, the share price rise is even better.
SNOOPY
Hi Snoopy, you seem to have an obsession with the number of shares that DPC have issued. If as you say shares issued have "doubled" but profits have more than doubled... what is the problem?
Their strategy also enhances the capitalisation of the company and will help get insto's on board and help drive future shareholder value.
You can either grow slowly organically or grow quickly through merger and acquisition (meaning off course either debt increases/equity increases or a mix of the two)
The problem, if you want to put it that way, is that doubling the profit while doubling the number of shares on issue means the share price goes nowhere. However, I don't see a problem with issuing more shares in general, if the shares issued result in the associated acquisition being earnings per share accretive.
The critical bit is the italics. If new shares are issued to one party for the purposes of an acquisition that are earnings per share dilutive, that is equivalent to robbing all existing shareholders excluded from participating in the increased capitalisation of the company.
Company directors crow long and loudly about record profits. But as shareholders what matters are record earnings per share. IME, companies that issue lots of shares have a tendency to gloss over eps figures.
SNOOPY
Ah, OK Percy I see your point. But Dorchester is not consolidating or expanding an existing share base, which as you rightly say has no effect on the market capitalisation.
Dorchester is issuing hundreds of millions of new shares acquiring new businesses, which is quite a different thing. That certainly does affect market capitalisation.
SNOOPY
Snoopy, Now the share price has reached 28.5c, my return on converting TUA to DPC shares at 25c has nearly surpassed the 18% return on the bonds that you will get in 2 years.
I'm happy with the DPC strategy of issuing shares if they are eps accretive.
Half year results are imminent.
showing up on the radar now that tua takeover completing maybe interesting going ahead
The FY2014 report came out many months ago now. Unfortunately the disclosure of banking arrangements is very poor, and leaves me none the wiser. I have however gone back to the Simmons report issued in late 2013. On page 10 it says this:
"Under the current terms of the OCNs (Optional Convertible Notes) , the Company may not grant a first ranking security over the assets of the Company and its subsidiaries (excluding DPLI) exceeding $25 million, effectively limiting bank borrowings to this level. The Company has current bank facilities of approximately $22 million. The Board is of the view that additional bank funding will be required to fund organic growth and M&A activity over the next 18 months."
We can take it from this that banking facilities at the end of FY2014 were at least $22m.
SNOOPY
Why is the liquidity buffer ratio important? It doesn't matter how profitable a finance company is. If there is a need for cash in the current year, and the company cannot call on enough current assets to pay up, then the company will likely go out of business. This is effectively what happened when almost the whole finance sector in New Zealand collapsed a few years ago. So with that still fresh in the memory of high interest hunting debenture investors (and finance company shareholders) , this is probably the most important financial statistic of all. It is very frustrating when a company's annual report does not detail the headroom in their banking facilities. However, with a little sleuthing I know have it (a minimum of $22m with the banks). So, at last, we can see where DPC stood at the end of their financial year.
From note 26b in AR2014, we can see that the company's Financial Assets that are due to mature in the next twelve months are:
$26.463m + $8.229m = $34.692m
On the same page we see that borrowings that must be repaid or refinanced with Dorchester's banking syndicate amount to:
$0.723m + $7.648m = $8.371m
Under note 24 secured bank borrowings are $17.565m. That still leaves borrowing headroom of:
$22m - $17.565m = $4.435m
This is the extra amount of capital that DPC could borrow at 31-03-2014 -should they need to- without any renegotiations with their bankers.
However, in this case the $34.692m in maturing business more than covers the $8.371m of capital due. So there is no need to resort to borrowing headroom. DPC's liquidity is just fine.
SNOOPY
Time to update this most critical of statistics for the just finished half year. On 21st August 2014 Dorchester announced they had renegotiated their banking facilities, presumably to rather more than the previously disclosed $25m ceiling, in anticipation of the takeover of Turners Auctions.
On 9th September 2014, Dorchester announced they had secured a bank debt facility of up to $39.55m to fund the acquisition.
In the same press release the projected debt required to be taken on in repect of 100% acquisition of Turners (which is what happened) was declared as:
(iii) Acquisition of 100% Shareholding
(Purchase of 80% in addition to the current 20% shareholding)
Share issue at $0.25 $30.0m
Bonds $18.0m
Bank Debt $18.0m
$66.0m
So this means the bank debt facility projected to be available to the rest of DPC was:
$39.55m - $18m = $21.55m
Unfortunately the detail in the HY2015 press release, outlining the match or mismatch of maturing customer loans to the underlying bank debt was non existent. So until more detail is published in the half yearly annual report, this is as far as my analysis can go.
SNOOPY
Above posted 09/09/2014
Always good to know the nose can still "smell the money."
DPC are forecasting a profit before tax of approx. $23mil for year ending 31/3/2016 while the balance sheet at 31/3/2015 should show shareholders' funds of approx. $120mil and total assets of $265mil.
i am looking look 40c sp soon
those updated profit figures make the pe looks cheap
Yes, I sure wish I'd had the intelligence and foresight to take bonds instead of shares for my TUA shares. Oh well, too late now.
My bonds are unsaleable are they?
Anyone buying a DPC bond off me will be able to buy DPC shares for 30c (The actual number of shares being calculated from the face value of the bond) in October 2016. As a bonus, while you are waiting, you will receive 9.0% interest (gross) on the face value of the bond. However if the share price goes down below 30c by October 2016, you retain the option of getting the face value of the bond back in cash in October 2016.
Now, how much would you Bunter, (or anyone else), pay me for say $10,000 worth of bonds at face value on those terms? (genuine question)
SNOOPY
dividend ex date wednesday, 2 days left to buy
Be careful.
The company was a mess.MD Paul Byrnes with board support put the business back onto strong footing.The business is now moving forward.My view is the fun is only just beginning,and the next two or three years will provide you with the Ham and Turkey.Not sure about the wine and beer,but you will be well feed.!! lol.
Sgt P, please note my latest remarks on HNZ. ;)
should be settle for a while., has make a reasonable profit..quitting
Thanks'
Actually for a novice I think I have picked ok, my wish list a year ago was
Tower : profitable , and a takeover target
Heartland NZ; excellent prospects
Genesis: reliable dividend flow
Dorchester Pacific well managed , appealed to my contrarian instincts.
My friend who has invested successfully in shares for some time, has one rule.
1.Look at the brokers share pick list published in January in NBR and Sunday Star times
2. NEVER buy those shares
not fo the short term., one or two years time50c..acheivable i think
The feeling I get, and alluded to in recent announcements, is that DPC is actively and enthusiastically pursuing new opportunities and I wont be surprised if there are some very positive announcements in H2.
Disc. A holder so I'm biased.
Great picks.
Suggest having a look at the Sharetrader Stock Picking Contest top 5 too.
Last year those five miserably underperformed the NZSE50 and the brokers' picks.
This year (so far) they are:
HNZ 7 DIL 6 XRO 6 PEB 5 ATM 4 POT 4 SUM 4
HNZ I like but the rest you can keep.