Hi Cyril
Thanks for your excellent analysis. I agree with the thrust of your argument, but can’t derive all your figures.
For what is worth, I reckon that nav fell slightly in Dec Q to 30c after a small loss, assuming nil change in impairments, but then need to add back accounting profit on sale of CF which could be $10 to 15m- so perhaps nav = 34c now. However, I concede that the cash picture is more important to valuation.
I think FCs at 31/3/21 (AR P50) were only enough to frank 8.3c of divs; 1c was paid in July and 7c now declared, so the FC balance is almost exhausted. I assume that’s why they chose 7c rather than a higher figure. I doubt that TGA will generate new FCs for a while given its large tax losses.
Free cash at 30 Sept 72.9m + 44m CF sale- 23.4 divs = 93.5m (so I assume that this is how your derived 94m = 27.6cps. But I think it’s better than that: there would have been 2, probably 3, months of invoicing cycles of CF between 30 Sept and the CF sale date, say $5m pm, giving another $15m. Against this, I estimate net free cash outflow from the group for Dec Q was about $4m. So I reckon free cash pro forma at 31 Dec but XD is about $10m higher than your number, hence $105m = 31c.
I agree that there is $25m of residual equity tied up in the warehouse as Tranche F, but I think that’s only if all the impairments come good i.e. reverse. Tied cash at 30 Sept was only $18.7m= 5.5c. I concede that I may not correctly understand the frozen interest rate spread in the WH and whether that’s on top of tied cash, or part of it. But even if the tied cash is $25m = 7.4cp I don’t see how you derive as much as “42 c of cash in the business”
My concern is the breakeven size of the residual BF needed for TGA to be profitable. The half year report says opex in BF was $5.4m (after backing out the impairment credits) + $3.5m of corporate cost that BF will now have to shoulder = say $9m per 6 months, or $18m pa. (Equivalent figures for FY21 12 months, excluding BF’s impairment expense, were $8.5m opex for BF+ $7.5m for corp.= $16m pa. BF book consistently earns about 12.5% pa before impairments, and average cost of WH funds is about 5%, so the gross spread is about 7.5% pa. If that needs to cover $18m pa of costs, even assuming NIL impairment, it needs a book of $240m. Of course much more to make an adequate ROE.
I agree that this is all feasible, but will take time to reach that scale and will probably lose money before then. Board and management have made great improvements over last 12 months, especially to sell CF, but the work hasn’t finished.
I hope that you’re right that TGA will hold on to only $50m: it would be great to get another return of capital of say $40 to $50m from the free cash, on top of the present div. I’m afraid that they might dissipate cash if they hold onto more. I also hope that TGA will refinance the warehouse soon. The WH lenders (or the trustee) have been uncooperative (probably frightened) over the last 2 years and a more flexible, new structure should be started.
