PGC
29/08/2012 17:03
FLLYR
REL: 1703 HRS Pyne Gould Corporation Limited
FLLYR: PGC: Preliminary unaudited results
NZX Announcement
29th August 2012
Managing Director's Report
These are the first annual results since the completion of the AEP takeover
on April 2nd 2012.
We also believe they are the first accounts in the 93 year history of PGC to
be completed and managed by an external accounting firm. In April we
replaced the internal accounting team at PGC with Deloitte.
PwC were appointed as auditor for the 30 June 2012 year-end. The audit will
be completed during September with the final audited accounts dispatched to
shareholders within the annual report on or about 30 September 2012. It is
anticipated that the net loss and total equity in the audited financial
statements will not vary materially from those presented today but
reclassification between line items and changes between corresponding
balances are possible. The accounts presented reflect a restatement of the
2011 financial position to appropriately recognise MARAC financial assets and
liabilities of $121 million pursuant to the management agreement with Real
Estate Credit Limited (RECL), which were previously not recorded. This
restatement is to ensure compliance with the financial asset de-recognition
rule, under NZIAS 39.
Year to June 30 2012
The year ending June 30 2012 produced an unaudited after tax loss for PGC of
$47.7m.
The loss was non cash and largely attributed to $46.1m of non cash write
downs, the largest being $20.7m from increased expected claims under the RECL
management agreement for Marac assets and $25.4m from mark to market of
securities, of which PGW represented $14.4m.
In addition Perpetual Group, after accruals for increased legal and
restructuring costs made a loss of $5.1m.
At an operating level in its core business of Torchlight GP, PGC made a
profit of $1.6m.
Core Business
Torchlight Investment Group owns 100% of Torchlight GP No 1 Limited. It also
owns 17% of, Torchlight Fund No 1 LP.
Torchlight GP made an operating profit of $1.6m. This represents annual
management fees from Torchlight Fund No. 1 LP.
Torchlight Fund No. 1 LP began in October 23rd 2009 and has raised and now
invested $150m. While it made a high profile investment in South Canterbury
Finance in late 2009, today its principal assets are in Australia. The
largest position is a senior debt position Torchlight acquired and
subsequently placed in receivership from a major international bank's 'bad
book'. The underlying assets held as security represent many thousands of
residential sites spread across Australia and New Zealand. Torchlight
investments are very long term and like other contrarian investors, who are
investing in residential development sites we believe we are buying real
estate assets at the bottom of the market. We are investing at a fraction of
peaks from 2006, and expect to realise a substantial premium to our cost,
over the next decade.
This is the OPPOSITE from the finance companies - who helped create the peaks
of 2006 and funded clients to acquire land banks at record prices.
Another major Torchlight Fund No 1. LP investment is a cornerstone investment
in ASX listed IEF Real Estate Entertainment Group, which is one of the
largest freehold pub owners in NSW.
Torchlight Fund No. 2 LP is incubated as a "house fund" and is 100% owned by
PGC at this stage. It is focused on financial services. In Australia it has a
cornerstone holding in well-regarded Australian asset manager and research
house van Eyk. In New Zealand it has, since early 2010, focused on finishing
Project New Tulip, the "third leg", of the finance company strategy
The finance company sector in New Zealand was one of the great tulip bubbles
in market history. Over $4 bn of national savings was invested in finance
companies. Most lost forever by mum and dad New Zealanders.
Behind this national tragedy there was a rational business model required. At
a big picture level we saw this as an opportunity to execute a coherent
strategy to protect and create value for shareholders and deliver a private
sector solution to an industry that had failed its investing and borrowing
clients.
The first leg of the strategy, which became Heartland, was to create a magnet
for the "good books" under high quality management.
The second leg of the strategy, as part of, Torchlight Fund No 1 LP, was to
create a magnet for "bad books" and acquire debt of distressed borrowers.
The third leg of the strategy, as part of, Torchlight Fund No 2 LP, was the
logical next step, once all the assets had gone. This was Litigation Funding
- holding to account those responsible at the time the losses were incurred.
This is a "mid cycle" opportunity, but such was its importance that in early
2010 we began investing in litigation funding specialists.
Heartland was the clear winner in the "good bank" space. Torchlight 1 a
significant winner in the "bad bank" space (both in New Zealand and
Australia) and now operates internationally. We intend Torchlight 2 to be
successful, in a quieter way, by working with very experienced litigation
funders on both sides of the Tasman. Clearly, this is first a business
opportunity. However, we believe it is important that investors, small and
large, who lost by depositing with finance companies, access justice.
We place great reliance on expert litigation funders, to win back depositors'
money from failed finance companies via carefully researched and resourced,
sustained litigation.
EXIT OF NON-CORE ASSETS: UPDATE ON SALE OF PERPETUAL GROUP AND RETURN &
REDEPLOYMENT OF CAPITAL CURRENTLY INVESTED IN NEW ZEALAND
On 30th July PGC announced that it was considering offers for Perpetual
Group. That process is on-going.
Since balance date PGC has sold all its shares in HNZ and PGW, leaving the
holding company with a totally debt free balance sheet and access to
sufficient cash flow. PGC is still evaluating its domicile and will advise
the market when it has completed its assessment.
We can say that as the majority of future PGC investment will now only be
investing offshore or via the funds it manages, we intend to return to
shareholders the proceeds of the sale of Perpetual in the form of a capital
return.
Return on Equity
The Group, from its actions in the past financial year and events subsequent
to balance date, is now in a position where it holds over $100m NTA at book
value equivalent to 43 cents a share and the holding company is now debt
free.
Our target is growth on book value over a 10-year period exceeding 15% per
annum.
This cannot be achieved off inherited bad loans from Marac. They need to be
patiently realised and reinvested in the core Torchlight business.
The challenge is that these assets are earning low returns relative to size
and in the case of property create cash losses while these assets are turned
to cash. The objective is for all assets to be in a single operating
business of Torchlight and the cost streamlining for 2013 reflects that
strategy. Torchlight, once scale is achieved, is expected to exceed 15% pa
from a combination of asset returns from Limited Partner positions and
management fees.
This can only be achieved by concentrating on a single profitable and highly
focused business. Hence all of our activities are about exiting non-core
assets and redeploying capital for greater long-term returns.
George Kerr
Managing Director
End CA:00226630 For:PGC Type:FLLYR Time:2012-08-29 17:03:28
