Over Provisioning
The reason Slater ( or any other investor) would be interested in SHJ is simple:
1)Its substantially undervalued, the stock price should be double to triple what it is; &
2)The company is ridiculously over provisioned. SHJ provisions 19% Slater <10% for same type of book. Slater could buy SHJ outstanding book and immediately realise about $35m of profit by applying their provisioning rate. This is roughly the amount SHJ are keeping from its shareholders, and the tax man. It is the Nest egg of all Nest Eggs and its time SHJ execs were answerable for it.
I have been quiet on this issue for a long while as I did not want to provide any ammunition to the class action, which was indeed based on provisioning.
Management have been clipped for over estimating profit by decreasing the provisions, the doomsdayers who predicted this would sink SHJ were wrong, it was as I predicted a very manageable mistake. I hope the SHJ board do not expect to pay this from profits and hold the shareholdes responsible for their negligence, especially as it should , and I believe must be paid for from provisioning!
SHJ execs reacted to their error by significantly increasing the provision rate from under 10% to well over 20% , it currently sits at around 19% and pressure must now be brought to bear to force them to return the provisions to normalised/actual rates and to not touch them again until actuarily determined. A conservative 5% decrease to 14% will release $20m+ of profits and still keep reserves well above historical averages and 5% above it’s closest competitor in operation, which is also ASX listed, subject to the same regulations and were both audited by E&Y.
In their prospectus SHJ advised decade long performance at below 10% bad provisions , they CONSERVATIVELY sold the prospectus at around 11 or 12% then brought it down to about 5% at its lowest ( resulting in the class action) they then let it blowout to well over 20% like it was a YoYo but unfortunately for shareholders it did not bounce back, and leaving it there has robbed us of $20m profit, cause a significant decrease in value of company, missed substantial dividends and held the share price down. I can’t see any substantiation for this, and it gets even more interesting when you consider J&J.I have not got all the figures in front of me but lets say it is $45m gross.
45M at 19% provision = only 36.5 M of this account is credited as Net WIP. This means if they are successful $8.5M of additional profit must be recognised immediately. This is clear profit release from provisions that has no expenses attached to it.
I repeat this is $8.5 of ADDITIONAL profit beyond usual operations. The only way SHJ execs could hide this would be to Increase the WIPto well beyond 20% again--- 2.2% over $400m would do the trick, so lets put them on notice that they can’t do this and we will be watching them. We want our profits.
Lets put pressure on at AGM’s and via letters to their shareholders rep that the provisions must be brought down to 14% unless it can be proven mathematically why they should not. Each year is another year of evidence of WIP conversion and it’s time the shareholders were informed of ACUTAL performance of the conversion rate. This figure should be included in the Annual Report and show at least 7 years of actual results, so we can clearly track history and changes. Lets make them take the mystery out of this and take away their profit hiding levers away.
(20min delay)