The downturn in the financial sector has hit West Perth-based financial services company Centrepoint Alliance Ltd, which today reported an $11.8 million goodwill writedown and a full year net loss of $9.5 million.
The downturn in the financial sector has hit West Perth-based financial services company Centrepoint Alliance Ltd, which today reported an $11.8 million goodwill writedown and a full year net loss of $9.5 million.
The result compared with the previous year's net profit of $4.3 million.
The company's commercial finance division reported a net loss of $12.4 million while its insurance premium funding arm recorded a net profit of $2.9 million.
Group revenue was down 7 per cent to $45.8 million while earnings before interest, tax, depreciation and amortisation (before goodwill impairment) was down six per cent to $19 million.
Below is the commentary included in the report
Financial Results
Overall the Group's Financial Year 2008 results have clearly been adversely affected by the downturn in the Australian financial sector, which has flowed from the sub-prime crisis in the U.S.A. and the associated 'Credit Crunch'.
The main effects of this credit tightening have been a marked contraction in CAF's brokerage business levels and margins, particularly in the residential mortgage sector, and a series of increases in interest rates and borrowing costs.
The Company earned a pre-tax operating profit, before goodwill impairment, of $3.4 million incorporating a strong an resilient profit performance from CAF's insurance premium funding (IPF) business, partially offset by a trading loss
from the Commercial Finance segment. The Company has made significant progress in reducing its core controllable operating costs.
The cost reductions were offset by increased insurance premiums and legal fees. The deterioration of the profitability of the broking business and the suspension of the small on-balance-sheet equipment lending operations have led to an impairment of $11.8 million in the value of goodwill attributed to the commercial finance segment. Excluding the goodwill component, the result is in line with market guidance.
As the Statement of Cash Flows and the increase in net tangible assets per share show, CAF continues to generate healthy cash flows and a further improvement in its strong capital position. Moreover, CAF's funding lines have recently been renewed on competitive terms. A good foundation has been built in terms of capital and risk management, and operations with improvements continuing in this area. As a consequence the Group is well positioned to ride out the continued difficult trading conditions and to take advantage of other opportunities to grow and improve shareholder returns as they arise.
In the current environment CAF has taken a conservative approach to both provisioning and writing off bad and doubtful debts, maintaining a collective provision above June 2007 levels.
Further analysis of the trading results by business segment:
Insurance Premium Funding ('IPF')
CAF's IPF business has delivered a strong performance with a profit before tax of $4 million. This was achieved in an environment of falling insurance premiums, rising borrowing costs and increasing competition.
Despite the difficult market conditions and the planned cessation of the Professional & Business Fee product lines, core business volumes were maintained, with an overall drop in IPF loan volumes of only 5%. This is also significant given that it has been achieved in spite of the move to insurer funded worker's compensation in New South Wales and Victoria and an increase in in-house funding activities in certain sectors of the insurance broker market. We believe that we are continuing to gain market share and benefit from a growth in the market use of premium funding.
In fact revenues from IPF activities are marginally higher than last year, thanks to the offsetting impact of highergross lending rates. And although borrowing costs increased by 8.3%, gross margins on core business were maintained and even slightly increased over the previous year.
The high bad debt write-offs figure largely relates to previously provisioned loans (Financial Year 2007), and also results in a large off-setting reduction in provisions. In total, credit related losses, being the combination of debt writeoffs and net movements in impairment provisions, are significantly lower. The costs of recovering bad debts and insuring credit losses have risen, due in large part to the costs associated with recovering the Professional & Business Fee provisioned loans. Credit insurance costs have also increased in line with overall changes in the credit markets.
Commercial Finance ('CF')
Commercial Finance comprises primarily of CAF's finance broking / loan-origination services but also incorporates some equipment finance business funded on balance sheet. A decision was taken during the year to suspend any new lending in the equipment finance area, as it was determined to be non-core, and consequently, while it has continued to make a small contribution to profit, the loan assets have been in run-down mode since that time.
As part of the current strategic review (announced to the market in May 2008), management is focussing on achieving full value from the CF business segment; that value being driven by its deep and long-lived customer and funder relationships, its significant financing volumes and its high quality staff.
The net loss before goodwill impairment of $500k for the commercial finance segment is primarily due to the effects of the 'Credit Crunch'. A 16% fall in brokerage volumes was exacerbated by a reduction in commission levels leading to a 22% decline in segment revenue.
Given the difficulties in this market sector and forecasts for the next 6 to 18 months, conservative valuation estimates were adopted for goodwill on these businesses, with the consequence that an impairment provision for 100% of the goodwill has been taken in this business segment, resulting in an $11.845 million expense over and above the trading loss after tax.
Review of Operations
During the second half of the year it became apparent that the impacts of the 'Credit Crunch' were going to be more severe and sustained on CAF's commercial finance operations than initially anticipated. At the same time, the
excellent performance of the IPF operations underscored the robustness and importance of this segment to the Group.
As announced in May, the Company commenced a business review in June 2008. The two business segments have been segregated for reporting and management purposes; streamlining operations and ensuring transparency of
performance. The aim is to maximise value and profit in each segment.
Sean Littlebury, a senior executive with extensive banking and finance expertise, has recently joined the Group as CEO of our Commercial Finance operations. Bob Dodd has returned to his previous role as CEO of the Group's total IPF operations.
A key element of CAF's strategy is to build on its strong capital base and to implement a diversified funding structure for its IPF business to achieve competitive advantage, facilitate sales growth and reduce reliance and risk.
Securitisation of our IPF receivables commenced in March 2007 and has been successfully implemented and operated since that date. The international 'Credit Crunch' has of course severely impacted global and local markets for commercial paper, which has adversely affected the ability of the securitisation vehicle to on-sell our securitised
receivables. Our bankers have provided strong support for the facility throughout this period to ensure that CAF's business volumes have not been constrained.
Recently both the Securitisation facility and the Group's core funding facilities have been renewed on competitive terms. CAF is also well advanced with a project to seek and implement additional independent funding facilities.
Outlook
The outlook for CAF's insurance premium funding business appears to be improving. It would seem likely that interest rates have peaked in their current cycle and most forecasters are now predicting the next move to be downwards. In addition, insurance premiums appear to have bottomed and increases are being forecast for later in the financial year.
CAF holds a significant market share and is well positioned to consolidate and expand it. The work being undertaken to secure and broaden funding sources has the potential to further improve profitability and reduce risk.
The directors are therefore optimistic for the future of this business segment.
For the Commercial Finance segment, business conditions remain challenging in the current climate across global finance markets, and we expect these to impact our trading performance for this financial year. The current strategic
review is looking at the cost structure and organisation of the Commercial Finance operations, focussing on driving
shareholder value. The directors expect to be in a position to announce the future direction and strategy for this
business during the coming month.
CAF's market position appears to have been grouped with the small capitalisation financial services company sector.
As such, we do not appear to be benefiting from the fact that the large majority of our assets are short-term and are
being funded by short-term debt; that is a matched asset and liability book. Long-dated assets are either backed with equity, long-dated debt or a small amount of general funding. As a result, our liquidity position remains strong. We do not suffer from the issue of long-dated assets being funded by short-dated debt, the issue causing hardship for many in the financial services industry.
