BC3: Tier 1 & Tier 2 Lending Covenants 2013
Quote:
Originally Posted by
Snoopy
So without further ado, I will dive into the Dorchester FY2013 financial report and see how they stack up against these 'steer clear of the rocks' statistics.
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and disclosed reserves (defined as Tier 1 capital) of > 20% of the loan book.
What is defined as 'the loan book' for Dorchester is something I am still getting to grips with. However, if we think of it as "all liabilities less 'other liabilities'" (a conservative view) we get our target minimum equity figure.
0.2($70.765m - $8.239m)= $12.505m
Since total shareholder equity is $33.190m, Dorchester has no trouble with this test.
=> PASS
SNOOPY
BC2: Liquidity Buffer Ratio FY2013
Quote:
Originally Posted by
Snoopy
So without further ado, I will dive into the Dorchester FY2013 financial report and see how they stack up against these 'steer clear of the rocks' statistics.
We are looking here for a 'liquidity buffer' (including undrawn bank lines) of 10% of the loan book. My interpretation of this hurdle is that it requires us to look at how current liabilities are matched to current assets over a 12 month time horizon. It is akin to a 12 month cashflow 'stress test'.
Looking at note 25b in the annual report on liquidity risk, I see that Financial Assets that are held for availability over the next 12 months total:
$16.979m + $5.774m = $22.753m
Financial liabilities due for payment add up to:
$18.443m + $2.345m = $20.788m
That is a deficit of some $2m. Note 23 has detailed information on the bank facilities, but curiously no information on borrowing limits. Perhaps a longer term holder can advise me what is going on there?
SNOOPY
I really feel that I must intervene at this point
Quote:
Originally Posted by
Snoopy
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and disclosed reserves (defined as Tier 1 capital) of > 20% of the loan book.
What is defined as 'the loan book' for Dorchester is something I am still getting to grips with. However, if we think of it as "all liabilities less 'other liabilities'" (a conservative view) we get our target minimum equity figure.
0.2($70.765m - $8.239m)= $12.505m
Since total shareholder equity is $33.190m, Dorchester has no trouble with this test.
=> PASS
SNOOPY
Whilst I do not want to be seen to be hounding Snoopy I would like to clear up a couple of what I see as minor technical errors in this.
1) The loans you are concerned with are Assets of the company (money due to be repaid to the company) and not Liabilities. These are usually risk weighted but in the absence of the weightings to be applied use 100% to be safe (HNZ weighs in near 100%, ANZ is I think nearer 70%) and it comes in around $71m
2) Tier 1 Capital for Dorchester is definitely no more than $3.62m ($33.2m less intangibles less deferred tax).
$3.62m /$71m gives just over 5% which is a fail in anybodies book.
Best Wishes
Paper Tiger
Back from Lunch - Lontong & Es Teh Manis
Just to note that we are talking about a finance company and not a registered bank so Tier 1 etc do not formally apply.
Quote:
Originally Posted by
Snoopy
Ah, OK. I wasn't sure what to do with those intangibles. I thought that they might be included because at the time of creation they were a measure of someones confidence in future profits? But if you don't think they should be there, then I accept your argument PT.
The Reserve Bank & Basel Committees agree with me on this :).
Quote:
Originally Posted by
Snoopy
As for the deferred tax held as an asset, well it is real cash on the books even if eventually it is earmarked for the IRD. I haven't caught up with the full tax position of DPC. But I do know that in FY2013, the main element of their declared profit was a $1.746m 'tax benefit'. So you haven't convinced me yet PT, that while that 'cash' remains on the books it should not be used as a cash asset for ratio calculation purposes. Where in the accounts is there any inkling that DPC will actually have to pay any tax, anytime soon?
Deferred Tax on the Asset side is not cash on the books.
Nor is it money owed and to be paid to the IRD at some point, that would be a Liability.
It is the tax component of losses made by the company in this or prior years. These losses are very confidently expected to be offset against future years profits and thus reduce the actual (cash) tax to be paid in the future.
Note 8 tells you that they decided that $2.2m of tax from losses could be brought on to the books this year. Do not ask where it came from or why because that I do not.
Best Wishes
Paper Tiger
The Investment Case for Dorchester in September 2013
Time to bring together my investigation into the 'financial factors' that sit behind Dorchester.
Leaving aside the suggestion that the term Tier 1 and Tier 2 capital strictly apply only to banks, however you measure things Dorchester was short of capital last year. Management themselves recognized this and post the 31st March balance date there has been a significant injection of equity into the business. And at the same time the somewhat cloudy financial structure of the company was cleared up. I would argue now that even if you regard all capital contained within DPC as 'tier2', capitalization is now more than adequate by any standard. The reason for this is that DPC has an 'acquisition strategy' going forwards. The plan as the CEO has laid out in the budget is to grow organically although he does note in the AGM address to shareholders:
"debt purchase in both markets (NZ/Oz) does present a step out opportunity. We will take a conservative approach to debt purchase. We will not be relying on contributions from this activity to achieve budgeted profits nor will we carry costs in anticipation of securing any debt purchase."
That means the opportunity for a step up in budgeted earnings is there if there are debt ledgers out there at the right price.
As a result of the capital raising the gearing ratio of the underlying business is very conservative (I calculate 33.7%).
The main 'thorn in the ointment' for FY2012 was underlying earnings which were negative (-$0.133m). If nothing else the recapitalized company should see the interest bill drop from last years $2.55m. Underlying borrowings after the capital restructuring is complete were forecast as $13.9m, down from $22.784m as at 31st March 2013 (balance date). That interest adjustment alone should see the company move back into the black.
Profit forecast for the year ended March 2014 is $6m, with probably 80% of that figure coming from business development and 20% from a reduction in underlying debt. That represents an ROE of:
$6m/ $67.4m = 8.9% or $6m/ ($67.4m-$26.2m) = 14.6% if you take out projected intangible assets at the time of the recapitalization. I am not sure which is the most appropriate figure of the two to use. Any views?
Business is projected to increase in FY2015 where a $10.5m profit is budgeted for. Dorchester operates in a competitive market, and the individual gains in contribution from which which division are 'blacked out' in the CEOs 'Profit Forecast with Organic Growth and M&A' slide. Essentially the message is 'trust us, we know what we are doing'. From what has been revealed the business plan looks sound and achievable. Net tangible asst backing though is only
($67.4m-$26.2m)/479.342m = 8.6cps
So at 22cps market price today you are paying a significant asset premium for management expertise. Projected dividend yield will only be 40% of gross profit, and there will be no imputation credits due to previous years losses. $6m projected profit spread around 479.342m shares is 1.3cps. While a projected 0.5cps dividend is welcome, the gross dividend yield with the share price at 22c is only 2.3%. IMO the current share price cannot be justified on projected dividend yield alone.
With earnings projected to jump to $10.5m in FY2015 that dividend yield jumps to 4%. I would say at 22c the market has already priced in further growth above that. Whether you think investing at 22c is justified will depend on just how lucrative you think the longer term growth strategy will be. I don't see any hurry to buy into this company at 22c. But I will be putting DPC on my watch and wait list.
SNOOPY
How much capital is enough for DPC?
Quote:
Originally Posted by
Snoopy
But I will be putting DPC on my watch and wait list.
My above analysis of DPC is largely based on the post fund raising balance sheet of DPC as outlined in the pro-forma balance sheet slide presented to shareholders at the AGM on 23rd August 2013. However, to an extent this is a moot observation because the Chairman has clearly signalled that DPC is on the acquisition trail.
From the Chairman's AGM address:
"While there will be a range of views on what gearing or equity ratio is appropriate for a financial services company such as Dorchester, the Boards’ view is that there is some $50m of borrowing capacity to fund merger and acquisition opportunities."
Simple subtraction from the $67.4m of shareholder equity on the pro-forma balance sheet leaves $17.4m. I interpret that to mean that $17.4m is sufficient equity to 'cover' the existing working assets of the company comprising:
Finance Receivables of $31.4m, Reverse annuity mortgages of $17.7m, Financial assets including Funds Under management of $16.8m. These total financial working assets, that are ultimately owned by other parties not DPC add up to $65.9m.
$17.4m/$65.9m = 26.4%
This is in accordance with the >20% 'Tier 1' capital standard imposed by UBS and First NZ Capital on PGGW Finance, before PGGW finance amalgamated with Heartland bank.
Of course if you subtract out the $26.2m of intangible assets on the books then DPC would be in net negative shareholder asset position. I guess that is a strong argument to show that it is not appropriate to strip out intangible assets in this situation?
SNOOPY
Food is never far from the front of my mind
Quote:
Originally Posted by
Snoopy
....This shows that if you remove the capital structure costs away and compare the underlying earning capacity of the vehicle finance business, Dorchester is approximately twice as good as generating EBIT returns as TUA is!...
The figure you calculate for TUA is basically net profit before tax, but after everything else (interest, admin overheads, tea & biscuits, etc) as been accounted for.
The figure for DPC is before interest, tea & biscuits etc (look at the Corporate & Other column to see how much is consumed). [Update: actually looks like biccies are included but interest is not, maybe, it is hard to tell].
So you are not actually comparing tim-tams with anzacs.
Best Wishes
Paper Tiger
The DPC, TUA Cross Shareholding Relationship
As at 30th September 2013, Dorchester owned 5,432,088 shares in Turner's Auctions. In the 30th September 2013 DPC half year accounts , among the assets listed is an 'equity accounted investment' valued at $9.679m. This represents the shares held in Turners Auctions by DPC. Do the division and you will see those shares are valued on the books at:
$9.679m / 5.432m = $1.78 per share.
The majority of this stake was acquired from Milford Asset Management at $1.82. Since that time Dorchester have acquired more shares on market, which is why the average book price is now lower.
There are 493,971,377 Dorchester Pacific shares now on issue. If the TUA share price were to increase by 45c this would create an additional.
5.432m x 0.45 = $2.444m in wealth for DPC shareholders.
Spread over the number of DPC shares on issue, this will increase net DPC asset backing by:
$2.444m / 493.971m = 0.5cps
Of course this has already happened, because with TUA last trading at $2.40, the increase in share price has been book value has been 62cps. This means NTA of DPC has increased by 0.7cps since the 30th September balance date.
None of this is really enough to affect the fortunes of DPC going forwards IMO, even if it is nice to have a bit more 'capital in the bank' than you think.
SNOOPY
Dorchester Pacific - A Tigers View
It was recently suggested to me that what with the latest announcement from DPC I should take a look at them.
Firstly I have to say that I do not currently hold nor have any intention of buying into DPC because the average daily turnover of shares as I measure it (using a 64 day period) is too low. I do not like to get into anything I can not get out of
Having said that over the last three weeks turnover has on average been sufficiently high that if maintained the red flag would be swapped for an orange one and then I could reconsider a minimal holding.
Along with the recent increased volume above there has also been an increase in price which is a good sign.
So anyway a few numbers & assumptions
They have had a fun few years!
Profits = real money.
Shares on issue: 494M
FY2014 profit: $4M331
FY2015 profit: $10M500
FY2016 profit: $14M500
as per forecasts with basically no tax paid as past losses are used up. This is the most optimistic scenario tax wise. (this period is good for acquiring other stuff)
From then on tax paid on profits and 6% pa growth (so start paying a dividend with imputation credits attached)
FY2017 profit: $11M066 and so on.
So:
Value at 31-Mar-2014: $0.225
Value at 31-Mar-2015: $0.237
Obviously my values are less than current market price - I would say that the expected profit boost from having tax losses to use against profits for the next few years as had an effect.
Someone remind me to re-visit this once the FY2014 financial statements are released (in May).
Usual disclaimer: happy for anybody to come up with a different result.
Best Wishes
Paper Tiger
Not Everything is Perfect In Tigerland - Now Even More So
Quote:
Originally Posted by
noodles
Hi PT,
The tax losses are somewhere between 17-20million. Most of these are off balance sheet. I don't know why they are off balance sheet. In a recent presentation, Paul Bryners, reiterated that these losses still existed and would be utilised.
http://www.youtube.com/watch?v=P5Aqh...6FhnvLXUz1ZZsS
So I don't think they will be utilised by 2017.
p.6,7 of the AGM make interesting reading
http://www.dorchester.co.nz/Modules/...DocumentId=159
It targets NPBT of $20mill. This assumes 2 new business streams, organic growth, and acquisitions. They indicate that they can reach this target using current equity plus the issue of 100mill shares. Obviously there is a lot of execution risk in reaching these targets. At least they have a vision and a target. A lot of companies these days are focused on cutting costs. DPC are focused on building scale in their business.
If this target can be reached, it would significant increase your valuation as FY2017 NPAT would exceed $14.4mill. I actually think it will be higher as there will still be tax credits.
I really value your analysis on this because it highlights that the current share price does not excessively exceed what I consider your conservative valuation.
Thanks for performing some analysis.
noodles
One of the few downsides of living here is that broadband internet is not very broad and I have not looked at the video. I have read the AGM doc though.
But I am 99% confident that the $17-20M is the amount of losses that can be offset against future profits before taxation (note 18 of the FY2013 report supports this view). So the actual benefit would be say $20M * 28% = $5M6.
This would mean that during 2016 they would start paying tax and reduce the 2016 profit figure.
The thing with tax losses as an asset is that they are only an asset if you can use them, so when DPC was in deep trouble the accountants would have written them off. Now that there are profits you can write them back more or less as you can use them.
If we factor in the modified tax above and NPBT of $20M with 100M new shares (we will assume in FY2017) and then leave the growth thereafter the same then we can have
Edit: This is wrong:
Value at 31-Mar-2014: $0.274
Value at 31-Mar-2015: $0.296
Which I guess would make a few people happier.
This is correct - the 100m extra shares did not get into the works:
Value at 31-Mar-2014: $0.234
Value at 31-Mar-2015: $0.248
And I guess not so many people are happy - So Sorry.
Best Wishes
Paper Tiger
BC1: EBIT to Interest Expense Test, FY2014
Quote:
Originally Posted by
Snoopy
'EBIT' not listed in the DPC FY2013 annual report so I have had to derive it from other numbers. That means adjusting the NPAT for tax refunds before finallly adding back the interest expense.
($-0.133m + $2.355m)/$2.355m = 0.9453 < 1.2
=> DPC fails the EBIT to Interest Expense Ratio test.
Updating the performance metrics for the financial year just gone. I am interested in the underlying performance of the finance business at DPC. So I am leaving out the equity accounted earnings of Turner's Auctions in which DPC has a significant stake.
In addition, I leave out the effect of the substantial tax losses brought back onto the books which benefitted DPC shareholders during the year. While the benefit of bringing these losses back onto the books is very real for DPC shareholders, they are not useful when assessing the performance of the underlying business going forwards.
DPC paid no income tax for FY2014. So EBIT can best be estimated by adding to operating profit (huh, I thought EBIT was operating profit - obviously not so in the case of DPC) the interest expense:
($4.171m + $2188m)/$2.188m = 2.91 > 1.2
=> a big improvement from last year. DPC now passes the EBIT to Interest Expense Ratio test.
SNOOPY
BC4: Gearing Ratio FY2014
Quote:
Originally Posted by
Snoopy
The gearing ratio in based on the underlying debt of the company, stripping out the loans made to others on the balance sheet.
$70.765m -( $7.834m + $16.370m + $4.681m ) = $41.880m
Likewise on the asset side of the balance sheet we have to strip the finance receivables from the other (underlying) company assets. From the Balance Sheet.
$103.955m - $28.757m = $75.198m
Gearing Ratio = Underlying Liabilities/Underlying Assets = $41.880m/$75.198m = 55.7% < 90%
=> Pass Test
Updating the above FY2013 figures
The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities eventually payable to insurance policy holders on the balance sheet.
$52.630m -( $6.733m + $15.293m + $6.420m ) = $24.184m
Likewise on the asset side of the balance sheet we have to strip the finance receivables, and this case the equity investment in TUA, from the total company assets. From the Balance Sheet.
$126.682m - $37.726m - $10.209m = $78.747m
Gearing Ratio = Underlying Liabilities/Underlying Assets = $24.184m/$78.747m = 30.7% < 90%
=> Pass Test, and a large improvement on the previous year
SNOOPY
BC3: Tier 1 and Tier 2 Lending Covenants FY2014
Quote:
Originally Posted by
Paper Tiger
1) The loans you are concerned with are Assets of the company (money due to be repaid to the company) and not Liabilities. These are usually risk weighted but in the absence of the weightings to be applied use 100% to be safe (HNZ weighs in near 100%, ANZ is I think nearer 70%) and it comes in around $71m
2) Tier 1 Capital for Dorchester is definitely no more than $3.62m ($33.2m less intangibles less deferred tax).
$3.62m /$71m gives just over 5% which is a fail in anybodies book.
Best Wishes
Paper Tiger
I made a hash of this last year, but PT put me straight. So let's see if I can get it right this year.
I do realise that Tier 1 and Tier 2 capital are usually terms reserved for banks, and that DPC is not a bank. But to enable a comparison with other listed entities in the finance sector, please bear with me.
We are looking here for a certain equity holding to balance a possible temporary mismatch of cashflows. The company needs basic equity capital and 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)
= $74.052m - $25.912m - $6.761m
= $41.379m
Not sure if I should make another deduction for 'Investment in Associate' (the Turners shareholding) but my gut feeling is no, so I won't.
The money to be 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'
2/ 'Finance Receivables'
3/ 'Receivables and deferred expenses'
4/ 'Reverse annuity mortgages'
For the FY14 year these come to $77.65m
$41.379m / $77.65m = 53.3% > 20%
This is a big improvement on the fail grade of last year, and shows the result of the recapitalisation of the company during the year.
SNOOPY
BC2: Liquidity Buffer Ratio FY2014
Quote:
Originally Posted by
Snoopy
We are looking here for a 'liquidity buffer' (including undrawn bank lines) of 10% of the loan book. My interpretation of this hurdle is that it requires us to look at how current liabilities are matched to current assets over a 12 month time horizon. It is akin to a 12 month cashflow 'stress test'.
Looking at note 25b in the annual report on liquidity risk, I see that Financial Assets that are held for availability over the next 12 months total:
$16.979m + $5.774m = $22.753m
Financial liabilities due for payment add up to:
$18.443m + $2.345m = $20.788m
That is a deficit of some $2m. Note 23 has detailed information on the bank facilities, but curiously no information on borrowing limits. Perhaps a longer term holder can advise me what is going on there?
It is rather curious that despite DPC releasing a rather full set of their accounts to the NZX, these accounts do not contain any explanatory notes. Why would DPC have done that? It looks like I will have to wait until the actual full year report is published before I can assess 'current asset' 'current liability' liquidity issues.
SNOOPY
Margin FY2015 (projected)
Quote:
Originally Posted by
Snoopy
Also brought on board in the previous half year was the bringing forward of interest payments due on capital notes converted early to shares. This is listed as a $1.669m loss and comes in as part of the operating loss. I think this is misleading as this payment is not part of normal operations. The operating profit is more correctly:
$4.892m + $1.669m = $6.561m
Interesting that that figure does line up with the 30th April 2014 forecast!
So the 'real' margin ( NPAT/revenue ) for FY2014 was:
$6.561m / $31.327m = 20.9%
That figure is boosted by DPC paying no income tax because of previous losses. But it is still a good figure.
FY2014 is done and dusted so time to look forwards. The biggest change has been the acquisition of Oxford Finance, settled on 1st April 2014 the first day of the new financial year.
From the 17th March 2014 press release:
-----
Value of the (Oxford) loan book now over $50 million. Oxford Finance loans are originated through a mix of channels, including motor vehicle dealers, finance brokers, strategic partnerships with a number of smaller finance companies and direct lending. Over 75% of loans are motor vehicle financing. The business has a strong presence in the Wellington, Wairarapa, Taranaki, Hawkes Bay, Waikato and Bay of Plenty areas.
The acquisition will boost the value of our total loan book to close to $90 million and there remains good growth potential for both Dorchester Finance and Oxford Finance. Oxford Finance is well established with a diversified and loyal customer base, an experienced management team and a strong operational platform. We will continue to operate the business under the Oxford brand.
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.
------
The Oxford acquisition more than doubles the size of the new combined Dorchester/Oxford loan book. Finance receivables go from $37.725m to near $90m. But how will this acquisition affect the margin going forwards?
Without information on the state of the Oxford books pre acquisition it is difficult to know.
SNOOPY
I already answered that one
Quote:
Originally Posted by
Brain
I have been reading the heartland thread as well as this one. my understanding of finance companies and banks is limitted but my guess is that between the two the heartland bank offers much better prospects than Dorchester. Would Percy , PT and Snoopy agree with that?
Brain
Read this post and this other post to derive you view of my view.
My major problem with DPC remains the liquidity being to low to buy a minimum amount, but otherwise I think it is OK.
(Mind you, I would also like to see increased liquidity with HNZ)
Best Wishes
Paper Tiger