RHG's Friday Night Announcement
RHG's Friday Night Announcement
Welcome to another edition of Friday Night Announcements: when you don’t want it heard, you’ll hear about it here.
When a company reports its results after 5pm on a Friday afternoon, you can usually assume it’s a shocker.
Not so RHG. The company does have a habit of releasing its results when most observers have clocked off for the day, but the results are unfailingly better than expectations. It’s almost as if they are trying to keep the good news quiet (did I say almost?).
The company reported a profit of $43m for the half year. Adding that to the company’s existing pile of assets, RHG now has net tangible assets (NTA) per security of $1.11. The result was boosted by $11.3m of income released thanks to the refinancing of a funding facility but, even so, the cash this business is generating makes a mockery of management’s comment at last year’s AGM that the future runoff was ‘perhaps worth $15-20m’.
It generated a lot more than that in the past six months and there is plenty more to come. The runoff rate – the rate at which the loan book is being repaid – has slowed dramatically. In the past six months the loan book declined by only 12%, an annualised rate of only 23% compared with an annualised rate of 40% at the same time last year.
Those borrowers that can refinance away from RHG’s high home loan rates have most likely already done so. The majority of the remainder would be low-doc borrowers with limited alternatives in the current market. Unless there’s a dramatic change in the market, low runoff rates could be a feature of RHG’s remaining life.
I estimate there’s somewhere between $120m and $160m of post-tax value left in the loan book (assuming runoff rates of 24% to 35%). That would take the NTA up to somewhere between $1.47 and $1.62. If they buy back a large chunk of the shares at $0.88 each in the upcoming buyback, it could be substantially higher than that.
There is going to be a clear case for maintaining at least some shareholding in RHG post buyback. But we still don’t know management’s plans for the remaining business. Are they planning on paying regular dividends? Is this the vehicle for a new business or a return to the mortgage market?
For all this and more, keep your eye on Friday Night Announcements.
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Comments
Hi Steve,
As a follow up to RHG's Friday Night Special, I notice they show an NTA
of $1.15 vs. your $1.11 and under Note 12 "CONTINGENCIES"-Warehouse they're showing $75m of credit support to the SPE's which they say should be written down by $37m yet they also state that reduction is not reflected in their financials. Given this declaration, do you still think they will achieve the numbers you mentioned. It would be very helpful to get an updated excel sheet that reflects the new numbers. I must admit, the reporting standards of this company are a worry.
Hi Ed, the $1.15 includes capitalised transaction costs which I removed. I'm not sure about the credit support number - you need to take it off my numbers to be conservative. Accountants tend to want to err on the conservative side, though, so if they won't book it as a writeoff I'm not sure how likely it is.
Sorry but I thought if NTA had improved $1.11 then at the buy-back RHG would offer this rate + franking credit.
The offer from last year was on the assumption that the cash flow was in a rapid fall-off. This prediction was wrong so I would have thought the directors would alter the future offer to reflect the changed cash position. Is this not correct?
i think the buy-back amount would only have increased if they could sell the mortgage book, which they haven't. Cash earned seems to be used to pay down the term bonds and warehouse facilities, so they will stick to the 88c, and the chairman won't participate, citing not enough cash, but will hang around to use the substantially increased post-buyback NTA with a free (i.e. no) mandate. There is plenty of incentive for him to downplay the profit in the accounts, highlight the potential writedowns that he couldn't convince the auditor to book and continue saying profits will go downhill fast (as he did last half-year and was wrong).
Perhaps scepticism at the announcement was not so misplaced...
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