BC4: Gearing Ratio FY2016
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!
Turners 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)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces.
|
Assets |
|
Liabilities |
|
Shareholder Equity |
Finance (Not Underlying) |
$94.892m (3) |
- |
$85.403m (4) |
= |
$9.489m (6) |
Underlying Finance |
$167.592m (1) |
- |
$81.506m (5) |
= |
$86.090m (6) |
Finance Sub Total |
$262.488m (*) |
- |
$166.909m (*) |
= |
$95.579m (2) |
Auctions & Fleet |
$99.815m (*) |
- |
$65.582m (*) |
= |
$34.223m (2) |
Balance Sheet Total (All) |
$362.303m (1) |
- |
$232.491m (1) |
= |
$129.812m (1) |
Calculation (3) 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 = $94.892m x 0.9 = $85.403m (which is answer 4 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 the Turners Finace division. 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)
= $81.506m/$167.596m
= 48.6%
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? Rather better than the 65.6% that I have calculated for 'Geneva Finance' as it turns out. In practical terms this means that Turners has the capacity to expand their finance business loan book at a greater rate than Geneva, without issuing new capital. Not saying I wouldn't buy Geneva. But on this measure TNR looks better, which is probably why it trades on a higher PE than Geneva.
SNOOPY
An investment story: Chapter 1 'Introduction'
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 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% |
Over the last couple of years I have specialised in creating a lot of 'financial information' surrounding 'Turners'. However, although 'interesting' I have decided it is not that useful. The trouble is, a jumble of numbers on its own is just that, a jumble of numbers. What is needed is a cohesive thread to draw it all together, a 'story' if you like. Tell a story and suddenly the numbers have context and an overall meaning.
So here is the 'story' I intend to tell around TNR.
There are three characters in this story,
1/Geneva Finance (GFL),
2/Turners Limited (TNR) and
3/ Heartland Limited (HBL),
listed in terms of decreasing perceived risk. The characters are not equal. But they all operate in the New Zealand finance market. All at one stage took deposits from the public, but only HBL does this now. TNR is 'the one in the middle'.
The first statistic in this story is PE ratio. Investors need to know this, because they need to know how much Mr Market is currently prepared to pay for these companies' earnings. A company with more 'future potential' should command a higher PE ratio. Now, what might 'cause' a higher PE ratio?
ROE (return on shareholder equity) is a measure of how efficiently a company can deliver earnings from a given resource of equity. The higher the ROE, the more efficiently the company is using its capital. Net Interest Margin is another measure of efficiency. But this applies only to financial entities, and that doesn't include the adjunct Turners Limited Auction and Fleet business. A third measure of efficiency is the underlying gearing of the loan book. Put simply every finance company has an underlying shell, upon which is superimposed funds borrowed from a 'parent bank' (and/or depositor and [customers) and 'funds loaned' to customers as 'financial receivables'. With the underlying shell stripped out, investors can get a feel for how far the 'funds loaned' base is leveraged on the 'funds borrowed' base.
There are a couple of ways to present profits in an overexaggerated way. The first is to underestimate the impaired asset position. I look at the declared impaired asset position in relation to the total loan portfolio, including impared assets, to get a feel for this. The second way is to borrow to the hilt on your capital base. My preferred indicator for this is MDRT of 'minimum debt repayment time'. This is a number that answers the question: If all profits were poured back in to repaying debt, how many years would it take to pay off that debt?
To summarize:
1/ P/E ratio measures value.
2/ 'ROE', 'Net Interest Margin', and 'Underlying Gear of Loan Book' are three ways to measure why a higher than average P/E could be justified.
3/ 'Impaired Asset Position' and 'MDRT' are two measures to look at whether the accounts as presented are believable and long term sustainable.
With characters introduced, and the story outline told, it is time for the comparative battle to commence.
SNOOPY
Note: The continuation of this post now has its own thread:
http://www.sharetrader.co.nz/showthr...ners-Heartland
An Investment Story: Chapter 2 PE Ratio
Quote:
Originally Posted by
Snoopy
To summarize:
1/ P/E ratio measures value.
Note that:
1/ The financial year (FY) ends on 31st March for Turners and Geneva, and 30th June for Heartland.
2/ Geneva results have been adjusted for the recent 7:1 share consolidation.
3/ Turners results have been adjusted for the recent 10:1 share consolidation.
4/ Turners results for FY2015 taxed at 28% (the future rate) for better YOY comparison.
|
Normalised Profit |
Shares on Issue |
eps |
Share Price |
PE Ratio |
Heartland FY2015 |
$47.55m |
469.890m |
10.1cps |
$1.10 |
10.9 |
Heartland FY2016 |
Turners FY2015 |
[$19.006m-($0.010+$7.058)m] x 0.72 |
63.077m |
13.6cps |
$2.70 |
19.9 |
Turners FY2016 |
$15.517m-($0.200+$0.070)m |
63.431m |
24.0cps |
$3.10 |
12.9 |
Geneva FY2015 |
$2.194m |
70.435m |
3.1cps |
25c |
8.0 |
Geneva FY2016 |
$3.529m |
70.435m |
5.0cps |
48c |
9.6 |
The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?
SNOOPY
PS: the continuation of this post now has its own thread
http://www.sharetrader.co.nz/showthr...ners-Heartland