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