HLI - Helia Group

[sinner]

Can you explain why you believe valuations are more effective in the 5 year region as you mentioned above ?

Equities are claims on the long term cashflows of a business. What is the lifetime of a equity claim? It is not 1 day 1 month or 1 year, it is essentially infinite.

Valuations are borne out over the course of a business or economic cycle.

This is shown in the data again and again, everywhere you'd care to look. A lesson that investors always seem they need to relearn.

5 years is something life half of a business cycle (depending on how you measure) so it is only barely an appropriate.

I look at Fundamental advisory firms and they try to value companies based on their current balance sheets , then add in the likely EPSG, what contracts they have and how much will be generated going forward etc,etc and based on that analysis will work out the likely share price going forward.

So to me a valuation would be easier working it out every 6 months or so??

Depending on the data available one can work out the valuation as frequently as they choose. I am sure, for example, that Tim Cook works out the valuation for Apple on a daily or weekly basis. But so what? The frequency at which the valuation is calculated is not informative of the next 6 months returns and therefore holds low utility.

In the short/intermediate terms, undervalued shares can become more undervalued, overvalued shares can become more overvalued with both momentum and systematic/ideosyncratic investor risk preferences dominating even the perfect valuation.

Chasing results from quarter to quarter, report to report is how most sellside analysts operate and you can see from their own results how that works for them: read, crap. At best it turns into a game of chasing EPS momentum.

Here's a quote from the CEO of Sun Microsystems (later bought by Oracle at crappy valuations btw) during the popping of the first tech bubble:

“But two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

Note that the CEO of the company, with perfect information is operating:
* on a 10 year hypothetical investment duration (not 6 months)
* on a very very simple metric

to try and illustrate the importance of valuations.

 

[tech/a]

Note that the CEO of the company, with perfect information is operating:
* on a 10 year hypothetical investment duration (not 6 months)
* on a very very simple metric

to try and illustrate the importance of valuations.

This is however an extreme case.
sure at the time it was shared by a high number of other extreme cases.

How does this hold in not so extreme cases?
GMA for example or was $4.40 extreme.

 

[sinner]

This is however an extreme case.
sure at the time it was shared by a high number of other extreme cases.

How does this hold in not so extreme cases?
GMA for example or was $4.40 extreme.

Just going off comsec data for 2013-2014FY (which I assume released around Aug-Sep 2014).

Assume I was the owner of an unlisted private civil engineering company called GMA with the following result last year, trying to sell the company to your good self:

Net Profit before abnormals: 180.7 million
Shares outstanding: 650 million

So profit per share: $0.278

$4.40 would mean a ~15-16 multiple on profit per share (although the comsec chart only shows ~$4).

i.e. assuming that you believe current profit per share is a sufficient statistic to represent the long term future cashflows of GMA, then it'd take 15 or 16 years to get "paid back" what you put in as an owner of the business.

Would you pay $4.40 per share to buy me out of the business?

Of course, if you add the assumption of growth (and/or assumptions of compounding reinvested profits) that is where the projected payback goes down and your returns (whether you overpaid or underpaid) will become largely a function of how accurate your forecast for future profit growth was.

Right?

 

[tech/a]

Yes I get that. If Im going to buy and control the company
or perhaps buying enough in a share for a controlling interest.
Then I can understand attempting to gain an accurate valuation.
Makes complete sense. And of course $2.40 has its set of numbers.

There could be other reasons I'd want to buy--
maybe to increase my market share.

I don't know how you can get remotely accurate
over a 10 yr term with any company that wasn't
in the top 100 even then can be difficult HIH and
the likes.

I've seen studies on Professional recommendation
results over time and those I saw were no better than
any other form of stock selection.
Is there any papers you can direct me to?

 

[sinner]

I don't know how you can get remotely accurate
over a 10 yr term with any company that wasn't
in the top 100 even then can be difficult HIH and
the likes.

Yes that's right. You don't. But the fact that you don't know how it can be done is not really evidence of anything is it?

The goal isn't even to be super accurate. The goal is merely not to overpay for a share in a going concern and then use a fundamental stop loss (i.e. continued analysis of ongoing results) to decide whether or not to remain invested (since you bought into a good business at a good price) or sell out (since the business is no longer good or because the investment has become severely overvalued).

I am not really sure what HIH has to do with anything. My guess is that in 2001 you had an argument on a forum with someone who claimed that HIH was "good value" and you therefore believe that proves empirically that all fundamental analysis is flawed. Or, whatever.

I've seen studies on Professional recommendation
results over time and those I saw were no better than
any other form of stock selection.

So what? As I'm sure you've seen crappy technical analysis calls and crappy macro calls. What does that prove? When will you stop repeating yourself?

Is there any papers you can direct me to?

For real? I have posted so many links to value papers in so many threads...I quote sinppets of Hussman value discussion in like every second post...go back and take your pick.

 

[tech/a]

Yes that's right. You don't. But the fact that you don't know how it can be done is not really evidence of anything is it?

Yes correct but it is an observation over many years.

The goal isn't even to be super accurate. The goal is merely not to overpay for a share in a going concern and then use a fundamental stop loss (i.e. continued analysis of ongoing results) to decide whether or not to remain invested (since you bought into a good business at a good price) or sell out (since the business is no longer good or because the investment has become severely overvalued).

Yes agree with this as well.
My only observation with this is that a lot then put these stocks which alter their long term out look over a longer timeframe (Thus becoming a sell) become bottom draw stocks.

I am not really sure what HIH has to do with anything. My guess is that in 2001 you had an argument on a forum with someone who claimed that HIH was "good value" and you therefore believe that proves empirically that all fundamental analysis is flawed. Or, whatever.

No HIH was/is an example of a seemingly solid company that just goes belly up.
There are many.

So what? As I'm sure you've seen crappy technical analysis calls and crappy macro calls. What does that prove? When will you stop repeating yourself?

I totally agree. All analysis in my view is flawed and that's mainly due to its application in a trading environment.

For real? I have posted so many links to value papers in so many threads...I quote sinppets of Hussman value discussion in like every second post...go back and take your pick.

And all analysis works at some point and for sometime.
Profit will be determined (in my view) again to its application and the management of your trading.

Ill stop repeating myself when exponents of any analysis believe that their analysis on face value is un questionable. That a valuation or a signal is un questionable fact of pending profit.

When people understand you don't need a Doctorate in Economics to profit from the markets or a graduate
of a $20,000 Latest Technical Methodology course---so probably not that soon.

 

[sinner]

Ill stop repeating myself when exponents of any analysis believe that their analysis on face value is un questionable. That a valuation or a signal is un questionable fact of pending profit.

That is not what happened here. Rainman did some FA and was kind enough to share his thoughts. Others who think they know better came to make fun of his buying because of a few down days.

Actually, I won't bother describe what happened next, go back and reread it for yourself to see. My shorthand description would be "goaded into a retards pissing contest".

When people understand you don't need a Doctorate in Economics to profit from the markets or a graduate
of a $20,000 Latest Technical Methodology course---so probably not that soon.

You forgot to mention every time someone says anything you perceive as negative about a methodology you subscribe to (VSA/EW/tech) regardless of the actual contents or merits of the discussion.

 

[tech/a]

That is not what happened here. Rainman did some FA and was kind enough to share his thoughts. Others who think they know better came to make fun of his buying because of a few down days.

Actually, I won't bother describe what happened next, go back and reread it for yourself to see. My shorthand description would be "goaded into a retards pissing contest".

Never said it was.
By the way My comment of Bet Sentiment wins---was as you'd have worked out---a figure of speech.
A challenge was issued --- I accepted ----- Joe is richer.

You forgot to mention every time someone says anything you perceive as negative about a methodology you subscribe to (VSA/EW/tech) regardless of the actual contents or merits of the discussion.

Don't think that's the case either. Ill point out the strengths and weaknesses in any analysis I use-----Both VSA and E/W are way less than perfect---as I see them.
Ill also point out bad T/A if I see it on the boards.
But Ill give a reason-----albeit my opinion.

 

[satanoperca]

Stick to your knitting, my friend. You're a technical analyst guy. You're not competent to comment on valuation - with respect.

Maybe Sinner this is the comment from the Rainman himself that started the **** flying.

I cannot seem to find in the title, ye can only comment if you only apply fundamental analysis to your stock selection.

My comments not long after that where questioning how he came at the evaluation and whether the points he made were valid and correct. F--k me, I thought that what forums where for, discussion.

Funny how people behalf when they are loosing monies.

 

[Rainman]

... By the way My comment of Bet Sentiment wins...

Time is still running on this bet, my feathered friend. It is not over until 25 September 2016.

 

[Rainman]

Maybe Sinner this is the comment from the Rainman himself that started the **** flying.

I cannot seem to find in the title, ye can only comment if you only apply fundamental analysis to your stock selection.

My comments not long after that where questioning how he came at the evaluation and whether the points he made were valid and correct. F--k me, I thought that what forums where for, discussion.

Funny how people behalf when they are loosing monies.

I stand by those comments. But I am happy to be enlightened to the contrary.

If you know and apply only technical analysis, please tell me how you can say anything meaningful about whether a company is correctly priced or mispriced relative to its assets and earnings power by the market?

Now, before I have a bunch of angry TA guys jumping down my throat, I want it on the record that I think that TA has its place. TA shows how much interest there is in a stock, among other things. Resistance and support levels also seem to reflect quite clearly on occasions the fact that at particular points in time there are price levels beyond which buyers are unwilling to buy or at which sellers are unwilling to sell.

But it is absurd for TA devotees to pretend that anything revealed by TA says something fundamental about the value of a company - and this for the sole reason that TA guys are only ever interested in the price. And yet the price is precisely the aspect of a stock that highlights for an FA guy whether it is correctly priced or mispriced which in turn requires consideration of the underlying value of the stock's assets and earnings power.

Therefore, sticking to your knitting means: if you are a TA guy, analyzing a stock with technical analysis and not purporting to offer an opinion on a stock's pricing relative to its underlying value. Sticking to your knitting also means that FA guys don't analyze a stock with fundamental analysis and then purport to make findings about momentum and price patterns.

It is not that hard.

 

[Trembling Hand]

Good post Rainman.

 

[Ves]

In the 30 June 2015 results presentation they are claiming to have reinsurance cover of $915 million on their loan book.

I cannot find any details of how this type of cover works in their prospectus or market releases.

Does anyone know how this type of agreement generally works?

Do they pick LMI policies on their books that they consider to be "risky" and pay the re-insurer to cover the entire risk in case of loan default?

The above scenario seems the most likely as I doubt it is a cover-all agreement where the reinsurer agrees to cover the first $915m of losses for any loan defaults.

 

[McLovin]

In the 30 June 2015 results presentation they are claiming to have reinsurance cover of $915 million on their loan book.

I cannot find any details of how this type of cover works in their prospectus or market releases.

Does anyone know how this type of agreement generally works?

Do they pick LMI policies on their books that they consider to be "risky" and pay the re-insurer to cover the entire risk in case of loan default?

The above scenario seems the most likely as I doubt it is a cover-all agreement where the reinsurer agrees to cover the first $915m of losses for any loan defaults.

Generally, it will be non-proportional excess of loss reinsurance, which is just insurance speak for once you reach a level of payout the reinsurer covers the rest. So GMA will have an aggregate limit that they will pay up to in a given period, and then the reinsurer will cover additional loss. It can be measured across the portfolio of insured assets or mortgage to mortgage (I haven't looked so don't know). It's not usually done by passing the whole insurance risk on to the reinsurer (aside from other things that would create some pretty big agency risk for the reinsurer). The liability of the insurance contract is still with the head insurer, not the re.

 

[Ves]

Generally, it will be non-proportional excess of loss reinsurance, which is just insurance speak for once you reach a level of payout the reinsurer covers the rest. So GMA will have an aggregate limit that they will pay up to in a given period, and then the reinsurer will cover additional loss. It can be measured across the portfolio of insured assets or mortgage to mortgage (I haven't looked so don't know). It's not usually done by passing the whole insurance risk on to the reinsurer (aside from other things that would create some pretty big agency risk for the reinsurer). The liability of the insurance contract is still with the head insurer, not the re.

Thanks mate, I think that helps me figure it out.

On page 16 of the latest results preso there is a table

http://www.asx.com.au/asxpdf/20150805/pdf/4309m5cx9c987j.pdf

Looks like they have a fair few reinsurers involved (which is great, because you'd hate a single reinsurer to go bust and not pay out).

In the context of GMA, if my understanding of what you've said is correct:

GMA takes first $500m of losses
Provider 2 takes next $125m of losses

Of the next $1 billion of losses:

GMA takes at least $910m with $51m (provider 3) of reinsurance kicking in when total losses are around $650-750m and another $39m (provider 3) near the $1.5 billion mark.

From about $1.8billion loss mark to around the $2.7 billion loss mark there is $700m of reinsurance.

I believe it is fairly safe to say that before the reinsurer is even called that they've already ripped up around $0.80 per share in assets to foot the bill.

My conclusion is that the reinsurance contract doesn't help provide a margin of safety for an asset play, but it does mean that you are more likely to not lose every cent as an investor if the **** hits the fan. Small mercies, I guess.

 

[Ves]

Another question that I haven't answered yet:

Do WBC (and maybe CBA) see:

a) less risk in the market due to a move away from high LVR loans, so are happy to take the risk internally

b) take the risk internally and potentially use overseas reinsurance firms because it is cheaper than using Genworth / QBE LMI

c) know something about their loan books insured by Genworth that we don't (ie. they are deteriorating quickly) and wish to move all future business away from Genworth because it is becoming less likely that they will be solvent enough to pay the cover out in its entirety?

A combination of any of the three is also possible. Anything I've missed?

edit: I think the fact that Genworth, QBE and a major bank subsidiary make up 90% of the Australian LMI market tells you something about the scale needed to be profitable in this business.

 

[skc]

Another question that I haven't answered yet:

I remember reading something about how, if GMA loses more business, they get to release more excess capital over time. The PV of the stream of excess capital return is worth more than the share price (or something like that). I can't recall which analyst did the numbers but it was around the time when they lost WBC's business.

Definitely worth some research in your analysis of GMA.

In other words... to me this means that the market is pricing in a large payout. That's how it can trade below book value (in case it wasn't obvious enough). And I found it difficult to fully quantify the probability of such event, and hence determine whether GMA is cheap or not.

 

[craft]

In other words... to me this means that the market is pricing in a large payout. That's how it can trade below book value (in case it wasn't obvious enough). And I found it difficult to fully quantify the probability of such event, and hence determine whether GMA is cheap or not.

That's also my problem with GMA. Even in run out its quite cheap at 60% of net tangible assets not including the unearned premiums. If it remains an ongoing business like it has for the last 50 years it will return great cash flows. But with over ~300B of loans insured and ~3.5B of equity and re-insurance coverage in place it could conceivable blow up in a property market correction. Its US parent company share price is informative of what happens in a property bust - they did manage to survive, I don't know if they had to be re-capitalised.

 

[Ves]

I remember reading something about how, if GMA loses more business, they get to release more excess capital over time. The PV of the stream of excess capital return is worth more than the share price (or something like that). I can't recall which analyst did the numbers but it was around the time when they lost WBC's business.

Definitely worth some research in your analysis of GMA.

In other words... to me this means that the market is pricing in a large payout. That's how it can trade below book value (in case it wasn't obvious enough). And I found it difficult to fully quantify the probability of such event, and hence determine whether GMA is cheap or not.

Hey SKC,

I believe the analysis report was written by UBS, in fact they see a value that is higher than NTA in a run-off. I saw a few comments in an SMH article if I recall. I don't have access to their report, so no idea how they came to that conclusion.

I'm looking at GMA as more of an asset play, and considering run-off value in the event of them losing the CBA contract and the LMI market in Australia drastically shrinking. However, it obviously pays to study the market dynamics a bit and get a feel for the potential earnings base if something different happens.

You're correct that a shrinking insurance portfolio will add to the already excess capital position. They seem to be carrying about $500m excess on their balance sheet compared to their Prescribed Capital Amount (PCA) target coverage ratio.

The key to me is what happens in a number of the gloomier property bear phases and recession scenarios. I get the feeling that they may be OK if prices are moderately bearish.

Business leveraged to property cycles like banks and mortgage insurers are historically boom and bust, and it's all inherently linked to risk taking behaviour (or lack of).

Based on the LVR / change in price / insured amounts in their 30 June 2015 presentation, I'm a lot more comfortable with say a 15% fall in house prices and approaching 5% delinquency than I was initially. They'd still lose a lot of capital, maybe even up to the excess amount above, but I don't think it'd come close to knocking them out. Would be still equity left.

However, ramp the figures up to 30% and 5% delinquency and it starts reaching "ouch!" proportions IMO. I guess it stems down to how bearish one feels.

FWIW, ex-WBC and CBA they may still be able to earn EBIT in the order of $50m-100m including investment income, with a chance of rosier days in the next big risk-taking property boom (depending on how the market competition plays out).

Like most things in life, the beauty of situations like this are that they are not black and white. Often you can find something you're on the bearish side of for instance, but the market can be potentially far more bearish than you. It's all about probabilities and nuances by that stage.

Thanks craft, I haven't go around to checking out Genworth US yet. I'm sure their story is a rollercoaster given what happened in the last decade.

 

[craft]

Another question that I haven't answered yet:

Do WBC (and maybe CBA) see:

a) less risk in the market due to a move away from high LVR loans, so are happy to take the risk internally

b) take the risk internally and potentially use overseas reinsurance firms because it is cheaper than using Genworth / QBE LMI

c) know something about their loan books insured by Genworth that we don't (ie. they are deteriorating quickly) and wish to move all future business away from Genworth because it is becoming less likely that they will be solvent enough to pay the cover out in its entirety?

A combination of any of the three is also possible. Anything I've missed?

edit: I think the fact that Genworth, QBE and a major bank subsidiary make up 90% of the Australian LMI market tells you something about the scale needed to be profitable in this business.

Hey Ves

One thing that crossed my mind; With the banks being forced to raise their capital buffers and receiving no capital requirement offset for insured mortgages the banks might be thinking - we have to hold the capital anyway, why not self insure and claw back some of the lost ROE from higher capital requirements.

David Murray's financial services enquiry recommended that mortgage insurance be recognised in the capital framework where appropriate, if that ever gets implemented it would be a game changer in favour of GMA retaining the banks as customers.