Kuala Lumpur = Muddy Estuary
Thanks for bringing this [back] to our attention percy.
It is all clear as mud to me what the true position of MTF actually is.
What game are TNR's playing? The MTF shareholders or board can prevent them going over 10%. (Have I got that right at least?)
Best Wishes
Paper Tiger
TNR's own banking covenants to 30-09-2016
Quote:
Originally Posted by
Paper Tiger
It also makes me wonder whether TNR are setting themselves up for a potential fall in that I think that they are stretching themselves a bit and a knock would leave them with a sudden need for equity, especially given that Snoopy (& the other holders) can demand that he gets cash for his bonds next year.
Pulled out my Turners bond prospectus last night. I see that if I want my bonds to convert to TNR shares, I have to let TNR know one month before the maturity date of 30th September 2016. If I do nothing then all my bonds are repaid in cash. As you readers have probably figured out, I am extremely suspicious of investing in finance companies. But, as a bondholder seduced by that 9% gross yield, I stilll have this running one year trial with TNR to see if TNR, at least, can win me over.
Being a bondholder, we got all sorts of useful information on the banks arrangements with TNR, which you plebian shareholders don't need. However in the interest of open debate, I don't mind sharing with you.
From p34 of the bond prospectus, the TNR banking covenants:
1/ Interest Cover Ratio:
EBITDA/ Total Interest > 3.5
2/ Leverage Ratio:
Gross Debt / EBITDA < (Requirement). Requirement varies as below
Period |
100% Turners (TUA) Takeover |
< 80% Turners (TUA) Holding |
Issue date to 31/12/2014 |
3.75 |
2.00 |
01/01/2015 to 31/03/2015 |
3.50 |
2.00 |
01/04/2015 to 30/06/2015 |
3.00 |
2.00 |
01/07/2015 to 30/09/2015 |
2.75 |
2.00 |
01/10/2015 to 30/03/2016 |
2.50 |
2.00 |
01/04/2016 to 30/06/2016 |
2.25 |
2.00 |
01/07/2016 to Maturity |
2.00 |
2.00 |
The first column is the prevailing bank requirement. The second column is included as a comparison out of interest. At the time of the bond prospectus it was uncertain what holding percentage the then 'Dorchester Pacific' (now TNR) would secure of TUA, with their Turner's Auctions takeover. Thus alternative scenarios, based on the percentage of TUA shares that might be acquired were created in the prospectus. It is clear from the table that if TUA acceptances had been less than 80%, then the subsequent borrowing capacity of the then DPC would have been much more constrained. The fact that 100% of TUA shares were ultimately secured has opened the way for a debt fuelled expansion binge by TNR.
I would like to remind readers that since the 31st March balance date, TNR have acquired 'Greenwich Life' on 10-04-2015 and 'Southern Finance' (purchase price was $5.0 million for the net assets of
approximately $3.3 million and goodwill of $1.7 million) on 30-06-2015. Those purchases are not reflected in the latest published accounts. On top of that we now have the partial bid for MTF shares.
You can see from the table that the debt filled expansion party has to be brought under control such that by bond maturity date we are back to the same covenant level as before the full TUA acquisition. I would be grateful if any shareholder attending the AGM would ask how they are tracking towards that target!
SNOOPY
This title is intentionally blank
Quote:
Originally Posted by
black knat
Gee... that is a rather large error Snoop.
I must confess i can never understand the point to your detailed comparisons of TNR to a bank. It is not a bank and those that choose to invest do so, i suggest, with that understanding.
The business of a bank is what?
The business of Turners is what?
When you work out the similarity then you will realise the usefulness of such comparisons.
Best Wishes
Paper Tiger
BC2: Liquidity Buffer Ratio FY2015
Quote:
Originally Posted by
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.
All the above information was taken from note 26b-Liquidity Risk in the FY2014 annual report. The equivalent information is not so neatly tabled in the FY2015 annual report. When presentation of results changes from year to year, I immediately become suspicious: What has the company got to hide by changing their result presentation format? The current account information that I seek is still in the FY2015 annual report, but it is scattered. Let's see what happens when I bring it all together again.
Financial Assets |
0-12 months |
Reference |
Cash & Cash Equivalents |
$12.339m |
AR2015 p32 |
Financial Receivables Contractural Maturity |
$74.174m |
AR2015 p53 |
Reverse Annuity Mortgages |
$1.603m |
AR2015 Note 16 |
Total Current Resources |
$88.116m |
(addition) |
Financial Liabilities |
0-12 months |
Reference |
Current Liabilities |
$79.629m+$37.539m |
AR2015 p44 |
Total Current Liabilities |
$117.168m |
(addition) |
What we have here is an on paper 'theoretical' current shortfall of:
$117.168m - $88.116m = $29.052m
Of course there are ways to make up this shortfall.
1/Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.
2/There is $8.984m of stock on the books at the 'Fleet & Auction' division, that could be sold for cash.
3/ Retaining half (company policy is to pay out half of earnings as dividends) of the profit of $10.050m budgeted for the ensuing year.
4/ If any of the shortfall remained, the difference could be borrowed under the company's banking facilities. However, information on the capacity of spare banking facilities available is not listed in the annual report.
The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-
[(Contracted Cash Inflow) + (Other Cash Available)] > 1.1 x (Contracted Cash Outflow)
=> ($88.116m+$8.984m+0.5x$18.050m) > 1.1 x $119.459m
=> $106.125m > $131.405m (this is false)
The theoretical shortfall of $27.278m represents:
$27.278m/$142.827m = 17.7% of the end of year loan book balance
In summary, not a good result compared to the strong cash positive position of last year. The contractual cash deficit position of TNR is substantial, greater than the (record) full year profit in FY2015 of $18.05m!
SNOOPY
BC3: Tier 1 and Tier 2 Lending Covenants HY2016
Quote:
Originally Posted by
Snoopy
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (AR2015, p32).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Dorchester has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $121.002m - $103.595m - $8.532m
= $8.875m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $17.350m
2/ 'Finance Receivables': $142.827m
3/ 'Receivables and deferred expenses': $5.946m
4/ 'Reverse annuity mortgages': $13.253m
For the FY15 year these come to $179.376m
$8.875m / $179.376m = 4.9% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. A big increase in Intangible Assets over the year have done the damage to this statistic.
From note 22 in the annual report, $45.6m of intangibles was brought onto the books with the acquisition of TUA. $30.454m was brought onto the books with the acquisition of Oxford Finance. These companies were bought outright to become profitable acquisitions. A good margin over asset backing was paid because these assets were highly profitable, demanding any buyer to pay a premium. The downside is that should either of these assets suddenly become less profitable than expected an urgent capital raising from TNR shareholders could be required!
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (HYAR2016, p14).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Turners has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $125.810m - $105.145m - $5.310m
= $15.355m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $15.910m
2/ 'Finance Receivables': $164.436m
3/ 'Receivables and deferred expenses': $4.553m
4/ 'Reverse annuity mortgages': $11.878m
For the HY2016 year balance date these come to $196.771m
$15.355m / $196.771m = 7.8% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. The increase in Intangible Assets over the last six months (representing a business acquired over the period) needs to be considered. Southern Finance Limited was brought onto the books on 31st July 2015, just two months before the reporting period ended on 30th September 2015. .
From note 6 in the half year report, $1.677m of intangibles was brought onto the books with the acquisition of Southern Finance. The $1.677m is a measure of what Turners were prepared to pay over and above asset backing, because of the prospective profitability of the acquisition. Nevertheless $1.677m represents a minimal overall asset distortion to a company with over $100m of intangible assets on the books already. So I am judging the acquisition of Southern Finance, with a loan book of $9.5m, (under 6% of the total finance receivables loan book for TNR) , as not distortionary and hence not material for Tier 1 lending covenant purposes.
Put bluntly, while an improvement from the FY2015 position, I consider the capital behind this company is (still) insufficient for the size of the loan book.
SNOOPY
discl: shareholder and bondholder
BC4: Gearing Ratio HY2016
Quote:
Originally Posted by
Snoopy
The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from AR2015 Balance Sheet p32) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities
$207.970m -($9.260m + $16.378m + $7.476m) = $174.850m
Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.
$328.972m - $142.827mm = $186.145m
Gearing Ratio = Underlying Liabilities/Underlying Assets = $174.850m/$186.145m = 94% > 90%
=> Fail Test
The big spending Turner's acquisition of Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) have greatly increased the gearing ratio of the formerly conservatively geared company!
The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from HYAR2016 Balance Sheet p14) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities
$224.099m (declared total liabilities ofthe company)
less $10.517m (life insurance contract liabilities)
less $15.498m (life investment contract liabilities)
less $7.587m (deferred revenue)
= $190.497m (effective snapshot of net debt)
Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.
$348.909m (total assets)
less $142.827mm (finance receivables)
= $184.473m (effective snapshot of unerlying company assets)
Gearing Ratio = Underlying Liabilities/Underlying Assets = $190.497m/$184.473m = 103% > 90%
=> Fail Test
Things look to be going in the wrong direction.
Six months on from the period in which Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) were acquired, the greatly increased the gearing ratio of the formerly conservatively geared company has increased even further.
Borrowing money to significantly increase the size of the loan book while the asset base remains steady is a risk factor that should not be underestimated by shareholders!
SNOOPY
BC1: EBIT to Interest Expense Test, HY2016
Quote:
Originally Posted by
Snoopy
Updating for the FY2015 financial year (ended 31-03-2015)
The underlying interest expense is shown under note 7 (AR2015) to be $7.381m.
The underlying EBIT is a bit more complicated. There is a $7.058m gain recorded because of the write up in the value of the then Dorchester's existing stake in TUA to 'market bid value' level. But the market bid was made my Dorchester. So Dorchester have in effect bid up the value of their pre-owned TUA shares to a market level that they themselves have chosen. $7.058m is a one off self controlled capital gain that is not repeatable. IMO this should not be included in any underlying EBIT to Interest Expense ratio.
(EBT +Interest Expense)/(Interest Expense) = [($18.264m-$7.058m)+$7.381m]/$7.381m = 2.52 > 1.2
=> Pass Test
Updating for the HY2016 financial year (ended 30-09-2015)
The underlying interest expense is shown in the 'Condensed Consolidated Statement of Comprehensive Income' (p12 HYAR2016 to be $5.722m.
The underlying EBIT may be found in the same statement by taking the 'Profit Before Taxation' (EBT) and adding back the interest expense (I).
(EBT +Interest Expense)/(Interest Expense) = [$10.260m+$5.772m]/$5.772m = 2.78 > 1.2
=> Pass Test
'Post Calculation Thought'
It strikes me that by passing this test so easily, the profit margins at TNR must be generally higher than the finance industry norm. Given this, perhaps the 'failures' in the two previous tests are not as much of a concern as I previously considered. Others Thoughts?
SNOOPY
BC2: Liquidity Buffer ratio for HY2016
Quote:
Originally Posted by
Snoopy
The current account information that I seek is still in the FY2015 annual report, but it is scattered. Let's see what happens when I bring it all together again.
Financial Assets |
0-12 months |
Reference |
Cash & Cash Equivalents |
$12.339m |
AR2015 p32 |
Financial assets at value thru P&L |
$0.877m |
AR2015 p43 |
Financial Receivables Contractural Maturity |
$74.174m |
AR2015 p53 |
Reverse Annuity Mortgages |
$1.603m |
AR2015 Note 16 |
Other Receivables |
$4.616m |
AR2015 Note 17 |
Total Current Resources |
$93.609m |
(addition) |
Financial Liabilities |
0-12 months |
Reference |
Current Liabilities |
$79.629m+$37.539m |
AR2015 p44 |
Total Current Liabilities |
$117.168m |
(addition) |
What we have here is an on paper 'theoretical' current shortfall of:
$117.168m - $93.609m = $23.559m
Of course there are ways to make up this shortfall. Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.
If any of the shortfall remained, the difference could be borrowed under the company's banking facilities. However, information on the capacity of spare banking facilities available is not listed in the annual report. In summary, not a good result compared to the strong cash positive position of last year. The contractual cash deficit position of TNR is substantial, greater than the (record) full year profit in FY2015 of $18.5m!
Financial Assets |
0-12 months |
Reference |
Cash & Cash Equivalents |
$13.019m |
HYAR2016 p14 |
Financial assets at value thru P&L |
$0.365m |
HYAR2016 p23 |
Financial Receivables Contractural Maturity |
$?m |
n/a |
Reverse Annuity Mortgages |
$?m |
n/a |
Other Receivables |
$?m |
n/a |
Total Current Resources |
$?m |
(insufficient information) |
Financial Liabilities |
0-12 months |
Reference |
Current Liabilities |
$?m |
n/a |
Total Current Liabilities |
$?m |
(insufficient information) |
I am putting up the above table to show shareholders how much information is missing to allow any conclusions to be reached. IMO this is very poor disclosure, only a few years on from when the finance sector in NZ collapsed. Granted this company is not funded by public deposits. But in my mind, not providing enough information in the accounts to allow even a 'quick ratio' (current assets to current liabilities) to be calculated is disgraceful in 2016. I guess shareholders need to 'believe the story'?
SNOOPY
PS nothing published on the structure of company bank loans either!
BC3: Tier 1 and Tier 2 Lending Covenants HY2016 (Iteration 2)
Quote:
Originally Posted by
Snoopy
I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found in the 'Consolidated Statement of Financial Position' (HYAR2016, p14).
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and we are looking for disclosed reserves defined as:
Tier 1 capital > 20% of the loan book.
(Turners has only Tier 1 capital for these calculation purposes.)
Tier 1 Capital = (Shareholder Equity) - (Intangibles) - (Deferred tax)
= $125.810m - $105.145m - $5.310m
= $15.355m
The money to be eventually repaid to the company (assets of the company) can be found as assets on the balance sheet. This is the sum total of:
1/ 'Financial Assets at fair value through profit or loss': $15.910m
2/ 'Finance Receivables': $164.436m
3/ 'Receivables and deferred expenses': $4.553m
4/ 'Reverse annuity mortgages': $11.878m
For the HY2016 year balance date these come to $196.771m
$15.355m / $196.771m = 7.8% < 20%
=> Fail test
Care needs to be taken in interpreting a result like this. The increase in Intangible Assets over the last six months (representing a business acquired over the period) needs to be considered. Southern Finance Limited was brought onto the books on 31st July 2015, just two months before the reporting period ended on 30th September 2015. .
From note 6 in the half year report, $1.677m of intangibles was brought onto the books with the acquisition of Southern Finance. The $1.677m is a measure of what Turners were prepared to pay over and above asset backing, because of the prospective profitability of the acquisition. Nevertheless $1.677m represents a minimal overall asset distortion to a company with over $100m of intangible assets on the books already. So I am judging the acquisition of Southern Finance, with a loan book of $9.5m, (under 6% of the total finance receivables loan book for TNR) , as not distortionary and hence not material for Tier 1 lending covenant purposes.
Put bluntly, while an improvement from the FY2015 position, I consider the capital behind this company is (still) insufficient for the size of the loan book.
My earlier attempt at this failed to consider that in financial services terms, 'Turners Limited' is now a 'hybrid' company. Turners (TNR) now comprises what was the old Turners Auctions business (TUA), plus the debt collection service division, plus the finance and insurance services division. I need to extract the non-finance bits before I stack up 'Turners Finance' againast my finance company yardsticks.
Once again I am applying a 'banking covenant' to a non-bank. While not a legal requirement for TNR, this is to enable a comparison with other listed entities in the finance sector (real banks like Heartland for instance ;-) ), so please bear with me. The data below may be found or derived from in the 'Consolidated Statement of Financial Position' (HYAR2016, p14) and information on intangibles relating to TUA in AR2015.
|
Total Tier 1 Equivalent Equity |
$125.78m |
less |
Intangibles (excl. TUA) |
$36.89m |
less |
Deferred Tax |
$5.31m |
less |
Auctions Equity |
$5.99m |
less |
Fleet Equity |
$1.53m |
less |
Collection Services NZ Equity |
$5.54m |
less |
Collection Services Aus Equity |
$0.16m |
|
Underlying Financial Group Equity |
$70.56m |
This equity is supporting the following loan assets on the books.
|
Investment Bonds/Funds at fair value |
$15.91m |
plus |
Finance Company Receivables |
$164.44m |
plus |
Receivables and Deferred Expenses |
$4.55m |
plus |
Reverse Annuity Mortgage Loans |
$11.87m |
|
Total Loan Assets on Books |
$196.77m |
So: Underlying Financial Group Equity / Total Loan Assets on Books
= $70.56m/ $196.77m = 36% > 20% => pass test
The principal difference between this calculation and the first iteration is that all the intangible assets related to the TUA acquisition, which arose because TUA was so profitable (a good thing), have been ring fenced out of the calculation.
SNOOPY
BC4: Gearing Ratio HY2016 (Iteration 2)
Quote:
Originally Posted by
Snoopy
The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from HYAR2016 Balance Sheet p14) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities
$224.099m (declared total liabilities ofthe company)
less $10.517m (life insurance contract liabilities)
less $15.498m (life investment contract liabilities)
less $7.587m (deferred revenue)
= $190.497m (effective snapshot of net debt)
Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.
$348.909m (total assets)
less $142.827mm (finance receivables)
= $184.473m (effective snapshot of unerlying company assets)
Gearing Ratio = Underlying Liabilities/Underlying Assets = $190.497m/$184.473m = 103% > 90%
=> Fail Test
Things look to be going in the wrong direction.
Six months on from the period in which Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) were acquired, the greatly increased the gearing ratio of the formerly conservatively geared company has increased even further.
Borrowing money to significantly increase the size of the loan book while the asset base remains steady is a risk factor that should not be underestimated by shareholders!
Once again we want to back the equity and liabilities of businesses not related to finance out of the TNR finance division calculations.
|
Total Debt |
$224.09m |
|
Total Assets |
$349.87m |
|
|
|
less |
Finance Receivables |
$164.44m |
less |
Auctions Liabilities |
$16.77m |
less |
Auctions Assets |
$22.75m |
less |
Fleet Liabilities |
$4.42m |
less |
Fleet Assets |
$5.96m |
less |
Collection Service NZ Liabilities |
$8.24m |
less |
Collection Service NZ Assets |
$13.79m |
less |
Collection Service Aus Liabilities |
$0.69m |
less |
Collection Service Aus Assets |
$0.85m |
less |
Life Insurance Contract Liabilities |
$10.52m |
|
|
less |
Life Investment Contract Liabilities |
$15.50m |
|
|
less |
Deferred Revenue |
$7.57m |
|
|
|
Underlying Financial Group Liabilities |
$160.38m |
|
Underlying Financial Group Assets |
$142.09m |
Underlying Financial Group Liabilities/Underlying Financial Group Assets
= $160.38m/ $142.09m
= 113% > 90% => fail test
In this instance, ring fencing off the old TUA and Receivables Managment business assets and liabilities has made the result worse!
SNOOPY
BC1: EBIT to Interest Expense Test, HY2016 (Iteration 2)
Quote:
Originally Posted by
Snoopy
Updating for the HY2016 financial year (ended 30-09-2015)
The underlying interest expense is shown in the 'Condensed Consolidated Statement of Comprehensive Income' (p12 HYAR2016 to be $5.722m.
The underlying EBIT may be found in the same statement by taking the 'Profit Before Taxation' (EBT) and adding back the interest expense (I).
(EBT +Interest Expense)/(Interest Expense) = [$10.260m+$5.772m]/$5.772m = 2.78 > 1.2
=> Pass Test
'Post Calculation Thought'
It strikes me that by passing this test so easily, the profit margins at TNR must be generally higher than the finance industry norm. Given this, perhaps the 'failures' in the two previous tests are not as much of a concern as I previously considered. Others Thoughts?
I have found it necessary to do a lengthy deconstruction and reconsolidation of divisional earnings so that I can fully separate EBIT from the 'Finance Section' of TNR from all other earnings divisions of TNR. Head office costs have been farmed out amoongst the various company segments on the basis of segment revenue to totaldivisional revenue..
(EBT +Interest Expense)/(Interest Expense) = [$6.42m+$4.78m]/$4.78m = 2.34 > 1.2
=> Pass Test
Note this pass figure has been reduced from the previous iteration principally becasue because the highly profitable 'Auctions' and 'Fleet' businesses (formerly TUA) have been removed from the calculation.
SNOOPY
Overall Conclusion: HY2016 Financial Strength of TNR Finance.
The finance division of TNR should be watched carefully. If it becomes badly run, the viability of the whole company could be at stake. Of concern to shareholders should be the weak gearing ratio. Nevertheless this weakness is offset by the very high underlying profitability of the loans apparent in the EBIT to Interest expense test. Put simply IMO, because underlying profitability is so good , the balance sheet is being stretched a little more than an average finance company might allow as prudent. This trade off is working - for now.
Of concern is the very poor disclosure on loan maturity vs bank loan maturity in the half year results. There is more than adequate disclosure in the previous period full year results. Disclosure on other matters in the half year report is generally good. So it is puzzling to me why this very useful information has been omitted in the half year report. Maybe TNR management could hire a well known rugby player or newsreader, and have him appear on a TV ad campaign saying the company is 'solid as'. That would probably fix any doubts that we minion shareholders have ;-P!
SNOOPY
Head to Head: TNR HY2016 (annualised) vs HBL FY2015
Quote:
Originally Posted by
Snoopy
I need to do a 'head to head' analysis with Heartland to see how the two stack up 'side by side'.
This comparison is complicated by the fact that TNR is a fast evolving company. There has been relative stability over the last six month reporting period, with Southern Finance being acquired for $4.856m on 31st July 2015. But go back six months prior to that and there are so many changes that I have decided all previous figures must be regarded as historical interest only. The last six monthly reporting figures for TNR have been annualised to allow a better comparison with Heartland Bank.
I have done my own analysis breaking down the NPAT performance of TNR into divisions. This has become necessary because TNR is really a hybrid company now, with the very substantial Turners Auctions business a full subsidiary. That means a straight HBL vs TNR comparison would be in some instances misleading.
A further complication is that the time periods are not strictly comparable, because of the different end of year balance dates of each company. The most recent to report was Turners for the half year ended 30th September 2015. The loan book balances I have used in my later calculation table are shown below.
|
Heartland |
Turners (Finance Division) |
Loan Book 30-06-2014 |
$2,607.393m |
N/A |
Loan Book 31-03-2015 |
N/A |
$142.827m |
Loan Book 31-06-2015 |
$2,862.070m |
N/A |
Loan Book 31-09-2015 |
N/A |
$164.386m |
And here are the results of the calculations....
|
Heartland FY2015 |
Turners Limited 2x1HY2016 |
Turners Limited (Finance Divisions Only) 2x1HY2016 |
Share Price |
$1.12 |
$0.28 |
N/A |
Total Shares on Issue |
473.674m |
630.765m |
N/M |
Earnings Per Share (annual impairment charge removed) |
12.0c |
2.3c |
N/M |
Net Dividend (historical) |
3.0c+4.5c |
0.6c+0.6c |
N/M |
Gross Dividend (historical) |
10.4c |
1.2c (no imputation credits available) |
N/M |
Gross Yield (historical) |
9.3% |
4.3% |
N/M |
PE Ratio (historical) |
9.33 |
12.0 |
N/A |
ROE (averaged equity) |
12.2% |
12.0% |
11.8% |
EBIT /(Loan Book {averaged}) |
7.0% |
N/M |
12.8% |
Minimum Debt Repayment Time (MDRT) |
12.2 years |
10.6 years |
|
Impaired Loans / Total Loans |
0.57% |
|
3.9% |
Impaired Loans / Shareholder Equity |
3.4% |
5.2% |
8.3% |
SNOOPY
TNR v HBL Head to Head Round 1 (Overall Debt Cover)
Quote:
Originally Posted by
Snoopy
|
Heartland |
Turners Limited |
Turners Limited (Finance Divisions Only) |
Minimum Debt Repayment Time (MDRT) |
12.2 years |
10.6 years |
|
I would class the indebtedness of both companies as medium to high. This statiistic I have derived from taking the underlying borrowings (that means leave out customer deposits), and divide them by a normalised earnings figure.
For Heartland the calculation is like this (borrowings broken down under note 13 of Heartland annual report)
[($3.378m + $465.773m +$258.630m)-$37.012] / ($48.169m +0.72($12.105m) ) = 12.2 years
You will notice that Heartland's earnings have been boosted by $12.105m of impairment charges that I have added back in. If I had not done this, then the MDRT woudl have blown out to 14.3 years!
For Turners the annualized calculation is like this:
($168.948m - $13.019m) / 2( $7.432m - $0.042) = 10.6 years
In this case there was a small impairment recovery of $42,000. I have removed this from the profit.
Put bluntly, I am not happy with either of these results. But Heartland, despite what Mr Wheeler has agreed to is looking distinctly overleveraged. Also remember the Heartland balance date of 30th June 2015 was before the worst effects of the dairy price collapse were apparent. If I was a Heartland shareholder, I'd be worried right now.
Conclusion: Turners win round one of our head to head contest.
SNOOPY
TNR v HBL Head to Head Round 2 (Relative Profitability)
Quote:
Originally Posted by
Snoopy
Calculations backing up the above table entry are as follows:
Heartland:
$48.163m +0.72($12.105m) /( 1/2( $480.125m + $452.622m)) = 12.2%
Turners:
2x ($7.432m- $0.046m) /( 1/2 x( $125.810 + $121.002)) = 12.0%
From the above, Heartland NPAT for FY2015 with annual impairment charge removed was:
$48.163m +0.72($12.105m)= $56.879m
The annual interest charge, already taken out of the above figure is $43.515m (from Note 2, AR2015).
This represents: $43.515m/ $56.879m = 77% of NPAT
From the above, Turners NPAT (half year,no tax payable at operational level) for HY2016 with half yearly annual impairment charge (revaluation in this case) removed was:
($7.432m- $0.046m) = $7.386m
The annual interest charge, already taken out of the above figure, was $5.772m. This represents
$5.772m/ $7.386m = 78% of NPAT
Very interestingly, in percentage terms,there is almost no difference between the two.
However, Heartland faced an operational tax bill of $16.170m, for which there was no Turners Finance Equivalent.
$16.170m/$56.879m = 28% of NPAT
So despite ROE being close for Heartland and Turners over our comparison, we might expect Turners relative performance in ROE to decline, once they start paying full tax.
Conclusion: Heartland win round two of our head to head contest.
SNOOPY
TNR v HBL Head to Head Round 3 (Loan Shock Debt cover)
Quote:
Originally Posted by
Snoopy
|
Heartland |
Turners (Finance Division) |
Loan Book 30-06-2014 |
$2,607.393m |
N/A |
Loan Book 31-03-2015 |
N/A |
$142.827m |
Loan Book 31-06-2015 |
$2,862.070m |
N/A |
Loan Book 31-09-2015 |
N/A |
$164.386m |
And here are the results of the calculations....
|
Heartland |
Turners Limited |
Turners Limited (Finance Divisions Only) |
EBIT /(Loan Book {averaged}) |
7.0% |
N/M |
12.8% |
Impaired Loans / Total Loans |
0.57% |
|
3.9% |
Impaired Loans / Shareholder Equity |
3.4% |
5.2% |
8.3% |
The:
(i) EBIT to total loan book calculation,
(ii) impaired loans to total loans and
(iii) impaired loans to shareholder equity referred to above are calculated like this:
Heartland:
(i{H}): ($260.488m-$68.403m)/ [(1/2)*($2,862.070m+$2,607.393m)] = 7.0%
(ii{H}) ($10.201m+$6.242m)/ ($2,862.070m+$10.201m+$6.242m) = 0.57%
(iii{H}) ($10.201m+$6.242m)/ ($480.125m) = 3.4%
Turners (Finance Only) (i{T} annualised):
(i{T}): 2x ($5.901m+$4.008m-$0.046m) / [(1/2)*($164.436m+$142.827m)] = 12.8%
(ii{T}) $6.637m / ($6.637m + $164.436m) = 5.2%
(iii{T}) $6.637m / $79.54m = 8.3%
So what do I conclude from this? The underlying loan book at Turners looks a lot more profitable than Heartland, (based on the respective end of year loan balances). But it probably needs to be because the proportion of impaired loans to total loans is higher.
Meanwhile the impaired loans to shareholder equity is there to show how these impairments could affect the shareholders capital of the company. In the case of Turners I have apportioned the company equity so that $79.54m is behind the finance operation and the rest (adding to a grand total of $125.81m) is there to support the old TUA, insurance and debt recovery businesses.
Turners has a lot less 'effective equity' to support their loan book than Heartland does. Turners also have a possible cash injection coming up. The maturity of the TNRHA bonds will see some of those convert to shares. Of the $23m in bonds that are due to mature, lets say $12m convert to shares.
The proportion of that new capital that will go behind the finance side of the business would approximately be:
$12m x ($79.54m/$125.810m) =$7.6m
(iii{T}) (projected, revised) $6.637m / ($79.54m + $7.6m) = 7.6%
That is still well below the level of 'impaired loan to equity cover' that Heartland enjoys. On this 'Loan Shock Debt Cover' head to head, I am declaring Heartland the winner.
SNOOPY