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The warrants were not exercised, and had the Board allowed them to expire, refusing to allow them to be assigned then other shareholders would be materially better off. On ROE, the figures in the accounts take no account of the dilutive impact of the warrants and the loan stock conversion. That takes the ROE comfortably down to single digits. Note that the company will require significantly more than the minimum under Basel III in view of its small size and so above average risk of failure, according to regulatory norms. It won't be a huge multiple but it will be higher than statutory minimum. This exacerbates the issues around capital - being sub scale increases the capital that you need to write a certain level of business, which reduces the ROE....
No bank would operate with assets and liabilities matched unless it was a regulatory requirement, because it significantly increases a whole range of risks. Firstly, as there is no certainty as to future profitability because of the short duration of the portfolio, long term budgeting becomes more of a finger in the air job. Secondly, the portfolio is, naturally, concentrated around a narrow range of maturities, making the loan portfolio inherently more risky due to the lack of diversity. Thirdly there is no opportunity to add optimise shareholder value by providing liquidity at a more optimum point in the yield curve, since the maturity profile is fixed. Fourthly, a short duration loan book will not be able to benefit from the same range of security that a longer term book could. In particular, property lending at the short end is more limited, specialist and often more risky. I could go on. I agree that the remaining loan stock and warrants are not significantly dilutive to the share price but they are to the NAV. Had the loan stock been refinanced as straight debt and the warrants allowed to expire the NAV would have remained at the just shy of 13p level it was at the year end. Instead investors get their NAV diluted down to the share price. If there really was no alternative available to Jim Mellon refinancing the company and diluting shareholders' NAV by over 30%, that would suggest that the company is hardly in fine shape, in a market awash with liquidity. The debt should have been able to be refinanced at less than 5% and with straight debt. Given the type of lending being undertaken (consumer, receivables finance, equipment leasing) the rates are high and yet the business makes a marginal profit. If all goes really well and nothing blows up, the company could potentially creep into double digits ROE (with the loan stock converted). That is not an acceptable ROE for the risk shareholders are taking in investing in a very small, niche lending business, and suggests that the peak ROE is less than the WACC. If that is the case then the shares should trade at a significant discount to tangible NAV. A small, specialty finance business in the current relatively benign default conditions should be producing a 15-20% ROE but it is not and without a significant increase in the capital base it never will.
The new investment is £1m of additional capital, when the bank needs considerably more than that to grow a balance sheet big enough to achieve a decent ROE, given the fixed costs of running a bank. Eventually the loan stocks will need to be converted to bolster the balance sheet, that's a further 41.7m shares to be issued; the remaining warrants are a further 19.8m shares. At present these shares can't all be issued, since the authorised share capital is 150m shares and there are already 118.9m in issue. When the new shares have all been issued the NAV is not much more than the current share price. The company in its full year results trumpeted its growth in the UK PCP market, apparently unaware of the dire warnings that this market is a ticking timebomb, whilst the high margin loans that have maintained profitability of the bank over the last few years are being repaid at an accelerating rate. The regulator is worried about patchy record of profitability of this sub-scale bank and hence insists that assets and liabilities are matched to protect depositors, meaning that any profitability is short term and lending has to be replaced at a rapid rate. The solution for Conister long term has to be a balance sheet 2-3x its current size, which could maintain a level of profitability that would allow the regulator comfort to permit some mismatch of borrowing and lending, which could lead to a far more sustainable ROE and allow the bank to move to a better rating, on the assumption that the non-bank activities don't lose too much money. Unless the bank receives a major cash injection there is no prospect of sustainable profitability; once the market figures out that there needs to be a 1 for 1 or even a 2 for 1 rights issue, the 6p that the company managed to get Dr Greg Bailey in at will seem like a great deal for the bank, but perhaps not so smart for the new investor. In my view the company needs to bite the bullet, raise the cash required to remove the uncertainty and boost profitability before any progress can be made. Unfortunately, seeking to bring in investors piecemeal will only make the situation worse, since those new investors will be loathed to approve a large issue at a price that could attract new money, preferring to muddle on through. Jim Mellon will always get investors excited, but the facts are not pretty.
Can't believe FundingKnight will continue to be supported - the platform has written a handful of loans since acquisition last June, vs £1-2m a month prior to acquisition, and has effectively been shuttered.
NAV should use the year end shares in issue, not the average shares in issue during the year. Year end it was 309.3m, which gives 21.3p ex goodwill, but since then there is the sale of SMEF and the ongoing operational losses, which was what took my numbers down to 19.4p.
Have I got my maths right? The year end NAV was £90m, deduct the £25m goodwill within Sancus BMS, less the £2m or so they lost selling SMEF and another £3m for the operating loss for another year and you're left with £60m or thereabouts, equivalent to 19.4p per share; of which £36m, or 11.6p per share, is the platform investments. If you assume a 50% discount on the investments, to reflect realisable value, you end up with £42m, or 13.5p per share. I was hoping for a slightly more optimistic "back of an envelope" calculation, so I am hoping you can tell me that the numbers are wrong!
It was a buy on a whim CTW2014; I thought it was due a bounce and had made some good money elsewhere so I took out the stock on offer in the market. As you rightly pointed out, the stock was badly oversold. Hopefully it will rally into the low 20s to give a chance for a quick turn. To establish a floor to the price the company needs to publish a figure for net tangible assets, but without this and in the absence of a take-private deal from Somerston there will still be the risk that the shares once again hit a downward spiral, hence my purchase last week was a trade, not a long term buy