Giving Money3 A Broad Berth
March 02, 2017
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I late took a quick expect at ASX-listed Money3 (MNY AU). A well-known NZ-based small-cap outfit ain it in addition to receive got labelled it 1 of their top picks, in addition to Ray Malone, of AMA Ltd fame (AMA AU), is also the (non-executive) Chairman. I receive got followed AMA for a long fourth dimension in addition to admire the companionship in addition to what Malone has achieved alongside it, in addition to made proficient coin on the stock inwards the yesteryear (although I am long out of the stock at nowadays - I bought at 5c but sold way way likewise soon, at close 15c). MNY has also been growing apace in addition to the stock has done good over the yesteryear 5 years, in addition to trades at superficially minor earnings multiples (a depression teen forrad earnings multiple, although closer to 2x book).
What I industrial plant life horrified me, in addition to it suffices to state that I won't live on investing.
Who are Money3?
Money3 is a leading thespian inwards Australia's rapidly-growing non-conforming lending market, focused on sub-prime secured automotive lending, every bit good every bit unsecured personal loans to non-conforming borrowers. The companionship has been growing similar a weed inwards recent years, in addition to has continued to number bullish earnings growth guidance to the market.
Red flags abound
A cursory analysis of this companionship at in 1 lawsuit raises a number of cherry flags:
*Firstly, inwards the company's results commentary in addition to presentation materials, there is absolutely no reference to property lineament trends. Quite shockingly, inwards the company's recently-released financial 2017 interim accounts, there is absolutely no disclosure on property lineament trends whatsoever - fifty-fifty inwards the footnotes to the accounts. The only disclosure proffered relates to bad debt expenses, which, according to the company, roughshod (paraphrasing) 'from 3.5% to 2.5% of the majority YoY'. However, this relates only to what the companionship elected to write off inwards the P&L, in addition to says zippo close how conservative or aggressive this election was inwards calorie-free of underlying property lineament trends.
*Secondly, the inwards a higher house omission comes inwards spite of the fact that the company's full-year financial 2016 disclosures (which mandated the inclusion of some property lineament information inwards the notes to the accounts) exhibited a fairly stark growth inwards overdue loans every bit a per centum of the company's total loan majority (see below). More specifically, electrical flow in addition to less than 1mth overdue loans (aggregated, so nosotros don't fifty-fifty know what per centum of the majority is current) roughshod from 80.1% of the majority to merely 65.9% of the majority inwards 2016, while 1-3mth, 3-6mth, in addition to >6th overdue loans all increasing really significantly, alongside faster growth inwards the to a greater extent than significantly overdue categories. Furthermore, this occurred despite rapid continuing loan majority growth, which means that the seasoned majority probable performed fifty-fifty worse. There was non fifty-fifty a passing reference to this rapid deterioration inwards property lineament inwards the company's 2016 effect commentary in addition to presentation materials.
By comparison, provisioning was woeful. For instance, at financial 2016 year-end, the companionship had provisioned for only 28% of its greater than half dozen calendar month overdue loans. Six months overdue! This appears really aggressive to state the to the lowest degree - peculiarly because (1) non all of MNY's loans are secured; in addition to (2) for secured auto loans, the cost of repossession in addition to disposal of collateral is typically really high - peculiarly lower-priced cars which sub-prime borrowers probable disproportionately purchase. If MNY had adopted a to a greater extent than conservative approach to provisioning, it is probable it would receive got fallen good brusk of its 2016 earnings guidance.
*Thirdly, the company's investor communications receive got focused purely on trends inwards loan majority growth, in addition to growth inwards 'EBITDA' in addition to earnings. EBITDA growth is a wholly irrelevant number for a lending institution, in addition to indicates that this companionship is beingness run similar it is an industrial company, rather than a financial institution. This is a big cherry flag. Ray Malone has a strong rails tape alongside AMA, but I worry that he lacks sense inwards the financial sector in addition to is presiding over a much riskier concern model than he may live on presently aware (and is putting his hard-won reputation at adventure every bit a result).
Financial stocks are not like industrial stocks
Inexperienced investors inwards the financial sector focus on headline earnings in addition to residue canvass growth, ROEs, in addition to PE ratios, inwards a similar way to industrial companies. Experienced investors, however, know that inwards isolation, these metrics are irrelevant if non downright unsafe for financials. This is so for a number of reasons:
*Firstly, different industrial businesses, financials larn paid for taking risk, so a high ROE may live on less a sign of robust operations & a strong competitive seat (unlike what is commonly the illustration for non-financial businesses), in addition to to a greater extent than a sign of high leverage and/or excessive risk-taking. This is 1 argue why financial investors commonly focus to a greater extent than on multiples of majority than multiples of earnings, because you lot tin juice your earnings in addition to ROE yesteryear taking to a greater extent than risk.
*Secondly, different for most industrial businesses, you lot create non uncovering out if the profits financials are reporting are existent for many years. It is slow to grow reported profits fast yesteryear making a lot of novel loans or writing a number of insurance policies quickly, in addition to and then reserving for bad debts in addition to hereafter claims optimistically. You only uncovering out afterwards if the provisioning & claims reserves taken against these loans today are adequate or not. If they are not, the profits booked inwards prior years tin examine illusory in addition to receive got to live on completely reversed/written off inwards subsequent years every bit loss evolution emerges.
Because of this, the P&L results of a financial cannot live on sensibly evaluated without a concurrent analysis of property lineament trends; the conservatism of reserving; in addition to an analysis of the bird of adventure that is beingness taken to deliver those earnings. The lack of whatever such disclosures yesteryear MNY is thus a genuinely shocking omission, in addition to is symptomatic of either incompetence or of an active intention to obfuscate (I'm betting to a greater extent than on the former, although it may morph into the latter if property lineament keeps deteriorating - peculiarly because the companionship has committed itself to aggressive earnings targets).
*Thirdly, really rapid growth of whatever financial is commonly a cherry flag. Financials should live on run non yesteryear marketing people, but yesteryear capable in addition to prudent adventure managers. Rapid growth is commonly a sign that a financial is beingness run yesteryear marketing folk. That commonly results inwards keen growth in addition to optical returns during the bull stage of the cycle, but it almost ever ends badly when the bicycle turns.
A broader issue
There is also a broader number to consider alongside MNY's rapid growth in addition to its high bird of claimed profitability. Automotive lending is a mature manufacture inwards Australia. It has been roughly for a long time, in addition to levels of automobile ownership inwards Commonwealth of Australia are already high. Why is it that all of a abrupt organizations similar MNY receive got sprung upwards in addition to are able to grow so fast in addition to so profitably?
There are 2 potential reasons:
*Firstly, tightening banking regulations receive got resulted inwards traditional banks/lenders retreating from the sector, creating a vacuum for outfits similar MNY to fill. If this is the case, MNY volition in all probability create ok for a while, until the infinite becomes crowded and/or a recession hits.
*Secondly, to a greater extent than experienced institutions alongside ameliorate information sets may live on aware that the types of customers MNY is lending to are bad credits, in addition to so receive got avoided lending to them. If this is the case, MNY volition probable fare really poorly - peculiarly because Commonwealth of Australia is really belatedly bicycle at introduce in addition to is overdue a fairly severe recession & housing downturn.
Recent trends inwards MNY's property lineament advise that the latter explanation is to a greater extent than probable the illustration than the former. Every cycle, a novel batch of naive in addition to aggressive go-go lenders in addition to financial engineers emerge that brand the same mistakes every bit the sometime crop during the prior bicycle (which all invariably went bust). As the carnage of the prior bicycle is forgotten, investors get to fund re-birthed organizations that rediscover in addition to rush inwards to fill upwards the putative voids left yesteryear the prior moving ridge of second-tier lenders. MNY appears to live on singing from this song-sheet.
The best that tin live on said of the companionship is that they receive got kept their leverage relatively depression (to date), financing their growth primarily (but non exclusively) via equity issues. That is a proficient matter in addition to reduces the adventure of a consummate wipe out. However, at 2x book, alongside aggressive guidance having been pose into the market, it volition only accept 1 lucre downgrade to ship this stock downwards 50%.
I wishing MNY holders proficient luck. They volition take away it inwards my view.
LT3000
*The inwards a higher house analysis is furnished for informational/entertainment purposes only, in addition to is non to live on construed every bit investment advice. The writer provides no warranty whatsoever every bit to the accuracy of the contents of the post, in addition to reserves all rights to merchandise inwards whatever securities mentioned inwards whatever article at whatever time.
What I industrial plant life horrified me, in addition to it suffices to state that I won't live on investing.
Who are Money3?
Money3 is a leading thespian inwards Australia's rapidly-growing non-conforming lending market, focused on sub-prime secured automotive lending, every bit good every bit unsecured personal loans to non-conforming borrowers. The companionship has been growing similar a weed inwards recent years, in addition to has continued to number bullish earnings growth guidance to the market.
Red flags abound
A cursory analysis of this companionship at in 1 lawsuit raises a number of cherry flags:
*Firstly, inwards the company's results commentary in addition to presentation materials, there is absolutely no reference to property lineament trends. Quite shockingly, inwards the company's recently-released financial 2017 interim accounts, there is absolutely no disclosure on property lineament trends whatsoever - fifty-fifty inwards the footnotes to the accounts. The only disclosure proffered relates to bad debt expenses, which, according to the company, roughshod (paraphrasing) 'from 3.5% to 2.5% of the majority YoY'. However, this relates only to what the companionship elected to write off inwards the P&L, in addition to says zippo close how conservative or aggressive this election was inwards calorie-free of underlying property lineament trends.
*Secondly, the inwards a higher house omission comes inwards spite of the fact that the company's full-year financial 2016 disclosures (which mandated the inclusion of some property lineament information inwards the notes to the accounts) exhibited a fairly stark growth inwards overdue loans every bit a per centum of the company's total loan majority (see below). More specifically, electrical flow in addition to less than 1mth overdue loans (aggregated, so nosotros don't fifty-fifty know what per centum of the majority is current) roughshod from 80.1% of the majority to merely 65.9% of the majority inwards 2016, while 1-3mth, 3-6mth, in addition to >6th overdue loans all increasing really significantly, alongside faster growth inwards the to a greater extent than significantly overdue categories. Furthermore, this occurred despite rapid continuing loan majority growth, which means that the seasoned majority probable performed fifty-fifty worse. There was non fifty-fifty a passing reference to this rapid deterioration inwards property lineament inwards the company's 2016 effect commentary in addition to presentation materials.
By comparison, provisioning was woeful. For instance, at financial 2016 year-end, the companionship had provisioned for only 28% of its greater than half dozen calendar month overdue loans. Six months overdue! This appears really aggressive to state the to the lowest degree - peculiarly because (1) non all of MNY's loans are secured; in addition to (2) for secured auto loans, the cost of repossession in addition to disposal of collateral is typically really high - peculiarly lower-priced cars which sub-prime borrowers probable disproportionately purchase. If MNY had adopted a to a greater extent than conservative approach to provisioning, it is probable it would receive got fallen good brusk of its 2016 earnings guidance.
*Thirdly, the company's investor communications receive got focused purely on trends inwards loan majority growth, in addition to growth inwards 'EBITDA' in addition to earnings. EBITDA growth is a wholly irrelevant number for a lending institution, in addition to indicates that this companionship is beingness run similar it is an industrial company, rather than a financial institution. This is a big cherry flag. Ray Malone has a strong rails tape alongside AMA, but I worry that he lacks sense inwards the financial sector in addition to is presiding over a much riskier concern model than he may live on presently aware (and is putting his hard-won reputation at adventure every bit a result).
Financial stocks are not like industrial stocks
Inexperienced investors inwards the financial sector focus on headline earnings in addition to residue canvass growth, ROEs, in addition to PE ratios, inwards a similar way to industrial companies. Experienced investors, however, know that inwards isolation, these metrics are irrelevant if non downright unsafe for financials. This is so for a number of reasons:
*Firstly, different industrial businesses, financials larn paid for taking risk, so a high ROE may live on less a sign of robust operations & a strong competitive seat (unlike what is commonly the illustration for non-financial businesses), in addition to to a greater extent than a sign of high leverage and/or excessive risk-taking. This is 1 argue why financial investors commonly focus to a greater extent than on multiples of majority than multiples of earnings, because you lot tin juice your earnings in addition to ROE yesteryear taking to a greater extent than risk.
*Secondly, different for most industrial businesses, you lot create non uncovering out if the profits financials are reporting are existent for many years. It is slow to grow reported profits fast yesteryear making a lot of novel loans or writing a number of insurance policies quickly, in addition to and then reserving for bad debts in addition to hereafter claims optimistically. You only uncovering out afterwards if the provisioning & claims reserves taken against these loans today are adequate or not. If they are not, the profits booked inwards prior years tin examine illusory in addition to receive got to live on completely reversed/written off inwards subsequent years every bit loss evolution emerges.
Because of this, the P&L results of a financial cannot live on sensibly evaluated without a concurrent analysis of property lineament trends; the conservatism of reserving; in addition to an analysis of the bird of adventure that is beingness taken to deliver those earnings. The lack of whatever such disclosures yesteryear MNY is thus a genuinely shocking omission, in addition to is symptomatic of either incompetence or of an active intention to obfuscate (I'm betting to a greater extent than on the former, although it may morph into the latter if property lineament keeps deteriorating - peculiarly because the companionship has committed itself to aggressive earnings targets).
*Thirdly, really rapid growth of whatever financial is commonly a cherry flag. Financials should live on run non yesteryear marketing people, but yesteryear capable in addition to prudent adventure managers. Rapid growth is commonly a sign that a financial is beingness run yesteryear marketing folk. That commonly results inwards keen growth in addition to optical returns during the bull stage of the cycle, but it almost ever ends badly when the bicycle turns.
A broader issue
There is also a broader number to consider alongside MNY's rapid growth in addition to its high bird of claimed profitability. Automotive lending is a mature manufacture inwards Australia. It has been roughly for a long time, in addition to levels of automobile ownership inwards Commonwealth of Australia are already high. Why is it that all of a abrupt organizations similar MNY receive got sprung upwards in addition to are able to grow so fast in addition to so profitably?
There are 2 potential reasons:
*Firstly, tightening banking regulations receive got resulted inwards traditional banks/lenders retreating from the sector, creating a vacuum for outfits similar MNY to fill. If this is the case, MNY volition in all probability create ok for a while, until the infinite becomes crowded and/or a recession hits.
*Secondly, to a greater extent than experienced institutions alongside ameliorate information sets may live on aware that the types of customers MNY is lending to are bad credits, in addition to so receive got avoided lending to them. If this is the case, MNY volition probable fare really poorly - peculiarly because Commonwealth of Australia is really belatedly bicycle at introduce in addition to is overdue a fairly severe recession & housing downturn.
Recent trends inwards MNY's property lineament advise that the latter explanation is to a greater extent than probable the illustration than the former. Every cycle, a novel batch of naive in addition to aggressive go-go lenders in addition to financial engineers emerge that brand the same mistakes every bit the sometime crop during the prior bicycle (which all invariably went bust). As the carnage of the prior bicycle is forgotten, investors get to fund re-birthed organizations that rediscover in addition to rush inwards to fill upwards the putative voids left yesteryear the prior moving ridge of second-tier lenders. MNY appears to live on singing from this song-sheet.
The best that tin live on said of the companionship is that they receive got kept their leverage relatively depression (to date), financing their growth primarily (but non exclusively) via equity issues. That is a proficient matter in addition to reduces the adventure of a consummate wipe out. However, at 2x book, alongside aggressive guidance having been pose into the market, it volition only accept 1 lucre downgrade to ship this stock downwards 50%.
I wishing MNY holders proficient luck. They volition take away it inwards my view.
LT3000
*The inwards a higher house analysis is furnished for informational/entertainment purposes only, in addition to is non to live on construed every bit investment advice. The writer provides no warranty whatsoever every bit to the accuracy of the contents of the post, in addition to reserves all rights to merchandise inwards whatever securities mentioned inwards whatever article at whatever time.