mixed feelings, page-4

Persistentone:

I think you are being a bind blind-sided some of the accounting idiosyncrasies when looking at ROE.

It's a meaningless measure for WHG, principally because of legacy issues that are no longer relevant.

For WHG, like many other companies in the halcyon days leading up to the GFC underwent significant acquisition forays.

In the six years to 2008, WHG spent almost $160m on acquisitions which has left the company today with goodwill of $230m.
This goodwill is bloating the balance sheet and rendering ROE artificially low.

(This is a prime example of applying unqualified metrics to businesses; they need to be sanitised for context).

[In truth, the goodwill probably needs to be written off, but I’m agnostic to that event as it is a non-cash accounting entry]

In other words, you are getting a false reading because of the strategic mistakes made by prior management
(...providing, of course, that those mistakes have been definitively addressed, which I think they have given the company has not bought a single thing since the GFC, focussing instead on improving the underlying performance of the business).


A better way to look at the return-generating attributes of the business is in terms of Return on Tangible Capital (ROTE), i.e., the return currently being generated on the assets that require capital servicing of some or other kind.

In WHG’s case ROTE is today 40%, even during the current slump in business conditions for the company (Business Services EBIT is today running at $36mpa, down from a peak a few years back of $56m, and Financial Services EBIT is today running at $13mpa, down from a peak a few years back of $26m).

A manifestation of this high ROTE is that OCF covers capital expenditure by 15-odd times, on average.

At the current share price – and even at current depressed business conditions for WHG – the FCF yield is over 10%

That is what would be appealing to would-be acquirers, I strongly suspect.


Cam