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July 14

Geneva Finance…… A change of perception can lead to a market rerating

Vulcan_Capital
Geneva_Finance

The major shareholder of Geneva Finance with a 59% holding is Federal Pacific Group.
Federal Pacific Group is owned by Alistair (Father) and Alan (Son) Hutchison

Federal Pacific Group:

  • is still a major shareholder in CBL with a 19.5% holding;
  • has extensive investments in the Finance / Insurance sector in the Pacific Rim; and
  • own 59% of Geneva Finance

Alistair is:

  • a past Governor of World Bank and Governor of Asian Development Bank; and
  • a founding shareholder of CBL with Peter Harris

The input from the major shareholder and management are starting to have a positive impact on the bottom line of Geneva Finance. In 2007 GFL was on the canvas and out for the count, and although bloodied and bruised the current management, entered a moratorium in 2007, closed 21 branches, reduced headcount from 325 to 31, collected assets from and repaid $140m to debenture holders including $40m of interest. GFL maintained a low level of lending to keep core IP intact, and negotiated with Reserve Bank to keep the insurance co alive, repositioned the business out of 3rd tier into 2nd/1st tier, developed scorecard and rate for risk strategy, positioned the coy to exit moratorium.

This activity attracted Fedpac’s attention; In March 2012 they took a 19.9% stake in the company and in November 12 increased their stake to 34%. By August 13 the company had made sufficient operational progress, new funding facilities had been negotiated and the company was in position to exit moratorium. Fedpac again stood up and underwrote the rights issue to ensure the company could exit moratorium and was in a position to move into sustainable profit growth. During this period, Fedpac did not make any management changes, rather they have chosen to back existing management to continue to restructure and grow the company. While Fedpac has directors on the board the day to day running of the company is left to the current management.

While most of the restructuring has been completed work continues with the updating and implementation of “Customer Friendly” software and systems. The new software / systems will also assist dealers to complete transactions instantaneously and provide data for management to analyse loan and insurance risk. Management are already seeing the positive effects of the new software.

Geneva_Finance

Geneva Financial Services Limited (GFSL).

The company provides hire purchase finance, and personal loans, primarily to the Auckland market, secured by registered security interests over personal assets such as motor vehicles and household goods (e.g. furniture and appliances). The receivables ledger of $59m (Mar 17) has a wide spread of risk with and average loan size of $12,200 and an average contractual yield of 18.0%. Typical monthly cash collections total $ 3.2m. The ledger includes a high proportion of weekly and fortnightly payers with payments matching the customer’s income cycle. This assists collections management and further spreads risk.

Bad Debts currently run at 3.5% over 4 years which equates to 0.9% p.a yield loss. GFSL has recently implemented a Securitisation Funding line of $45m with the ability to expand. Management are aware that an amount of “Increasingly higher risk debt” is being issued around the market place. This may well present acquisition opportunities as some finance companies come under balance sheet pressure.

Quest Insurance Group (Quest)

Quest Insurance’s primary focus is on motor vehicle related products, Comprehensive Motor Vehicle insurance, GAP insurance, Lifestyle Protection Insurance and Mechanical Breakdown Insurance. Historically Quest has focused on providing insurance to GFSL’s customers when they take on a loan. Recently however, Quest has completed an agreement with Janssen Insurance which will have a significant impact on Quests market share and profitability, with policies sold expected to triple in the first year of operation. Quest currently deals with circa 50 dealerships across New Zealand, the deal with Janssen Insurance will distribute Quests product to 250 dealerships.

Geneva_Finance

Stellar Collections (Stellar)

Historically, Stellar has focused on collecting Geneva’s “Old Ledgers” i.e. loans written pre moratorium. In November 2007, these ledgers totalled $140m and the collection of these assets and the subsequent repayment of debenture holders was the key strategy to allow Geneva to exit moratorium. That task is now complete and Stellar is now looking at expansion of the debt collection operations e.g. through provision of contingent debt collection services and or purchase of distressed assets. Benefits from this strategy are expected in the third quarter 2018 and 2019.

Growth Opportunities

If we were to look at CBL Corp as a guide to how GFL might grow their business we would note that growth has come through acquisition and partnerships. GFL management have reviewed several companies to purchase but have found that “Typically assets are overvalued”. GFL management believe that opportunities will emerge as some operations will come under balance sheet pressure if there is a tightening in the market. GFL would have the ability to make a debt funded acquisition of $56m whilst retaining a conservative 17.5% ratio of shareholder funds to total assets. We understand that GFL were looking to purchase Janssen Insurance with negotiations ending in a partnership which will benefit both parties.

% of profit contribution ye 2017 forecast 2019
Geneva Financial Services Ltd 76% 70%
Quest Insurance Group 15% 18%
Stellar Collections 9% 12%
Geneva_Finance_Share_Price_May_2017

Comment

Geneva Finance presented to us as

  • Well managed, with latest IT platform being implemented to cutting edge.
  • Risk control / monitoring regarding lending book assisted via IT platform.
  • Growth with opportunity for expansion in each division.
  • More conservatively geared than most in the sector.
  • More conservatively geared than most in the sector.
  • Dividend pay-out to track at 30-40% of earnings. No imputation credits.
  • Major shareholder well credentialed in insurance and lending markets.
  • Well aware that sharemarket performance for GFL will be result driven.
  • *Tax credit expected to be available for next three years.
  • Conscious of weakness in business being predominantly Auckland, South Auckland.

In the GFL Market update May 17 the company states, “Maintaining profit growth patterns of the last three years would see the market capitalisation grow through the $50m threshold.”

So can the company continue this growth? We believe that this is possible and if achieved would indicate a price of 71 cents a share representing a 30% return (including dividend) from current levels which is commensurate with the risks involved in this sector. Expect some pe expansion if company delivers.

*Pre-tax Profit forecast 2018 = $5.1m @ pe 10 = target price 72 cents. Accumulate up to 57 cents.

Kind Regards,
All at Vulcan Capital

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