Finance companies problems - what problems?
The latest KPMG survey of Finance Companies and Savings Institutions demonstrates that there is a big difference between the public perception and the reported performances of these organisations. According to KPMG the finance company sector achieved total net earnings of $404.1 million for the 2007 financial year compared with $298.3 million for the previous year, as the interest rate margin increased from 4.3% to 4.4%. In addition the operating expense/operating income ratio rose from 49.6% to 49.7% and the sector’s gearing ratio improved from 8.3% to 10.8% (total equity divided by total assets). Nevertheless a number of companies went bust for a combination of reasons including: poor quality loans; a large number of related party transactions; inadequate operating cash flow; a mismatch between borrowings and loans and a concentration of loans to one sector or a small number of borrowers. KPMG is not prepared to make any predictions about the future. It leaves us with the following thoughts: “Short term, some say a loss in investor confidence is inevitable. Others see more regulation must follow, and worry about the effect of added compliance costs… Longer term, it’s less clear. We’ll just have to wait and see.” Sharemarket investors have taken a negative view of finance companies as the share price of all four stand alone listed companies, included in the KPMG survey, have fallen sharply this year. Lombard Group’s price has tumbled 60% since December 31, 2007. Dorchester Pacific’s share price has dropped 57%, New Zealand Finance is down 54% and Dominion Finance is off 40% over the same period. Listed standalone finance companies – unloved and unwanted Price Mkt. Value Price / Book P/E Gross yld Dominion Finance $1.23 $83.8m 1.6 4.9 16.4% Dorchester Pacific $0.90 $32.7m 0.5 10.4 14.2% Lombard Group $0.80 $18.7m 0.6 Loss None NZ Finance $0.65 $49.8m 2.1 13.8 4.6% The finance company sector is an interesting situation for equity investors that like to take a contrary view. Their decision on whether to invest in the sector will be dependent on whether they expect any further large finance companies to fail. Based on the recent share price performances of these four companies most investors are taking the same “wait and see” approach as KPMG to the finance company sector.
The Price/Book ratio, P/E and Gross Dividend Yield are based on the latest historic figures.
Brian Gaynor, 4 December 2007
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