...probably waiting until its $25 now
Printable View
Not waiting for any price now. Not looking to buy at the moment. I'm doing the part of the Hokey-kokey where you put your left foot out - so mostly out now of most things :)
The following information can be found in UDC's FY2017 annual report.
The 'profit before tax' is listed as $85.710m (p3). But this includes a provision for credit impairment of $5.929m which I would remove to get the picture of ongoing operational performance. So I get EBT of $91.639m.
Now go to note 3 (p11) on interest expense. There is underlying interest over and above what is due to debenture holders of $38.655m.
So total underlying EBIT = $91.639m + $38.655m = $130.294m (+22% on FY2016)
Now turn to page 12 (note 6) and you will see total net loans and advances of: $2,911.594m (a 13% rise on FY2016).
The operating margin ( EBIT/'Total Net Loans and Advances' ) based on the end of year loan balance book is:
$130.294m/$2,911.594m = 4.48%
Put in context, the operating margin over the last few years has gone like this:
Operating Margin FY2017 4.48% FY2016 4.17% FY2015 4.63% FY2014 4.41% FY2013 4.02% FY2012 3.87%
To Summarize: Operating Profit (EBIT) for FY2017 is up strongly, but this is largely due to the much higher interest bill being paid, outside of the the interest due to debenture holders. If you look at note 8, you will see that UDC debenture holders have pulled over $500m out of the company over FY2017. I see this as a significant loss of confidence by the investing public in UDC. This loss of confidence was perhaps precipitated by an announced sale to HNA of China, before that deal was pulled. The credit rating of UDC is now BBB (as assessed by Standard and Poor's) with a negative outlook. This is a very large fall from the AA- rating the company had just one year prior!
The loss of debenture support has been more than made up by the ANZ bank doubling its own capital support for UDC. In November 2007 this facility was further increased to $2,700m by UDC's owner the ANZ bank. At this level, all the remaining UDC debenture holders could be repaid! Since the company is now largely dependent on the ANZ bank to obtain borrowing capital for survival, it is not clear to me that a potential full 'sale' of UDC to another outside buyer by ANZ remains a meaningful proposition.
SNOOPY
UDC is dependent on commercial banks providing finance. The commercial bank doing this at the moment is ANZ bank. This could be substituted for another single commercial bank (If they were happy with this level of exposure to a single entity or were the trade buyer) or a group of banks. The key assets are the existing lending book, UDC's name and systems which keep the lending book at this size or growing. This is what you sell.
I take your point Scrunch. The point I was trying to make was that the commercial bank funding facility available over the last five years has looked like this
'As Announced' End of Financial Year Commercial Bank Funding Facility available Commercial Bank Funding Facility used Debenture Funding 2014 $800m $395m (49%) $1,569m 2015 $1,000m $280m (28%) $1,736m 2016 $1,800m $595m (33%) $1,592m 2017 $2,700m $1,385m (51%) $1,039m
Apparently the downstream effect of the pending (now cancelled) HNA sale (coupled with the UDC credit downgrade) caused a large reduction in the rate of renewal of debentures. The ANZ stepped in and has propped UDC up by supplying any extra credit required. But the mere fact that more bank backup is required would suggest to me the extra cost of the commercial bank funding now required would reduce the value of the UDC as a sales prospect.
If the new buyer (or buyers if UDC ends up being floated) keeps the ANZ as the back up commercial financer, that means the ANZ still retains a substantial exposure to the loan book. So I am not sure if 'selling' UDC would achieve much from an ANZ perspective in this instance.
SNOOPY
UDC Heartland EBT Loan Book EBT/Loan Book EBT Loan Book EBT/Loan Book FY2009 $34.024m $1,829.156m 1.86% FY2010 $45.012m $1,968.771m 2.29% FY2011 $46.382m $1,948.552m 2.38% FY2012 $58.476m $2,014.473m 2.90% $29.377m $2,078.276m 1.41% FY2013 $66.787m $2,065.117m 3.23% $36.540m $2,010.376m 1.82% FY2014 $83.501m $2,272.081m 3.68% $57.416m $2,607.393m 2.20% FY2015 $89.750m $2,347.163m 3.82% $76.304m $2,862.070m 2.67% FY2016 $88.835m $2,573.030m 3.45% $87.689m $3,113.957m 2.82% FY2017 $91.639m $2,911.514m 3.15% $99.568m $3,545.897m 2.81%
Note:
1/ UDC data for FY2017 is drawn from the 'UDC Finance Annual Report 2017' 'Statement of Comprehensive Income' (EBT) and 'Balance Sheet' (Loan Book Balance).
2/ Heartland Bank data for FY2017 'Statement of Comprehensive Income' (EBT) and 'Statement of Financial Position' (Loan Book Balance).
3/ All EBT figures are before 'credit and impairment charge'.
Note that the absolute figures year to year are not comparable between UDC and Heartland. This is because Heartland has a physical branch structure whereas UDC works out of ANZ bank branches. The underlying cost structures of both protagonists are not the same.
The individual company year on year trend is interesting though. The EBT Margin for UDC continues to decline, even as the previously improving Heartland EBT margin stabilises. Is the unusually large increase in the loan book size ('growth any any cost' to pump up a potential company sale price?) at UDC compromising the profitability for UDC going forwards?
SNOOPY
Time to normalise the UDC figures for 2017 so they can be compared more directly with the likes of Heartland Bank.
Heartland in FY2017 had selling and administration expenses of $71.684m (Heartland FY2017 report 'Selling & Administration Expenses', note 5). UDC had total operating expenses of $32.427m (UDC Financial Statement 2017, note 4). That is a difference of $39.257m. The two are comparable in that they have a similarly sized loan book (UDC:$2,911.514m, Heartland $3,545.897m). If we add the operating cost difference figure onto the UDC cost structure, what would that do to the UDC operating margin (EBIT where 'I' is the credit facility interest only) on assets?
FY2017: ($130.294-$39.257+ $9.002)/$2,911.514 = 3.44%
Note: UDC do not have a branch network of their own, but operate through ANZ bank branches in New Zealand. The $9.002m added back represents the adding back of 'fees paid to related parties' (ANZ). These are part of the $39.257m 'extra operating expenses' (calculated above, using figures from Financial Statements 2017, note 4). The $9.002m could be thought of as a contribution to the ANZ branch network that allows UDC to carry on business as normal. But what I am interested in is the difference in operating cost of a finance company with and without a branch network. So this $9.002m which largely reflects a 'branch network allowance payment' must be removed from my comparison.
For Heartland over FY2017 the equivalent calculation of EBIT (where 'I' represents interest paid not connected to debenture holders, and E represents the earnings before write downs) is as follows:
($99.568m+$25.714m) / $3,909.945m = 3,20%
This recent year trend in the underlying margin at UDC and Heartland is compared below:
EBIT Margin UDC EBIT Margin Heartland FY2017 3.44% 3.20% FY2016 3.07% 3.48% FY2015 3.53% 3.71% FY2014 3.37% 3.00% FY2013 2.58% 2.65%
In this context, FY2016 looks like a negative aberration for UDC. But the EBIT margin for Heartland is showing a declining pattern over the last three years. With UDC up for sale, could the earnings figures for UDC have been manipulated upwards over FY2017 in what is in reality a softer market? 'Earnings' in this context is a special kind of EBIT in which I have eliminated impairment charges. So I have removed the ability to reclassify assets as problem assets, and the ability to manipulate the company's bank loan structure to influence this earnings result. The principal driver of this EBIT is therefore revenue and this is almost impossible to manipulate. Consequently I don't believe the UDC figures are subject to manipulation.
SNOOPY
HNZ (FY2017) UDC (FY2017) Agriculture Forestry & Fishing: $836.977m (21.3%) $547.780m (18.4%) Mining: $19.006m (0.5%) $15.091m (0.5%) Manufacturing: $76.445m (1.9%) $59.203m (2.0%) Finance & Insurance: $395.804m (10.1%) $70.125m (2.4%) Retail & Wholesale Trade: $188.941m (4.8%) $367.256m (12.3%) Households: $1,717.407m (43.7%) $820.382m (27.5%) Property & Business Services $347.776m (8.8%) $171.163m (5.8%) Transport & Storage: $179.016m (4.6%) $442.523m (14.9%) Other Services: $169.867m (4.3%) $482.258m (16.2%) Total $3,931.239m (100%) $2,975.781m (100%)
Note:
1/ Heartland loans pre impaired asset adjustment. UDC loans post impaired asset adjustment.
The Heartland loan book has grown by 14% over FY2017 (ended 30-06-2017) , compared to a 12% growth over at the UDC loan book over the nearest equivalent period (FY2017 ended 30-09-2017).
At UDC, the press release highlights were motor vehicle lending increasing by $261 million (+28%), commercial lending growing by $51 million (+4%) and equipment dealer lending was up $12 million (+7%). Curiously those categories do not equate to the category loan disclosure made in the UDC annual report. Yes 'Household Lending' was up by $180m but Transport and Storage was actually down $18m. So I would guess that most of the increase in motor vehicle loans were made via retail car yards. The largest dollar increase in any category was $53.5m for 'Agriculture Fishing and Forestry' (up 11%). Curiously UDC chose not to highlight this.
At Heartland, the proportion of Rural Loans continues to increase, now 21.3% of the total up from 19.7% in FY2016, 17.6% in FY2015 and 16.1% in FY2014. Of the current 21.3% of rural loans, 8 percentage points of those relate to dairy (up from 7 percentage points in 2015). So Heartland offers the most financial exposure to 'rural' of any listed entity on the NZX, and it is getting bigger both in real and percentage terms! 'Household' which encompasses Consumer, Reverse Mortgage and Residential Mortgage saw the Consumer subset of loans grow 14% (+$112m), the majority of that growth seeming to be Motor Vehicle loans ( +$72m). However, we then learn that there has not been a consummate rise in earnings due to 'lower earnings rates on Motor Vehicles and Personal Loans'. Reverse mortgage growth has been significant, +12% ( $42.5m) in NZ and +19% ($83.6m ) in Australia. Ironically strong growth in reverse mortgages will continue to put a capital strain on Heartland because it means this subset of the operation remains cash flow negative.
There are early signs that the strategy of doing more business across all sectors 'on line' will be good for Heartland profitability going forwards.
SNOOPY
Is there any easy way to move my ANZ holdings from NZX to ASX? Would rather not have to pay fees both ways if I can. Reason is I want them to sit with all the other ASX shares - and more liquidity too if I ever need to sell