Solvar Limited (SVR) Earnings Call Transcript & Summary

Good morning, and welcome to Solvar Limited's First Half Financial Year 2026 Investor Presentation. On the line today we have on the right of your screen, Scott Baldwin, the Managing Director and CEO; and on the left, we have Siva Subramani, company's CFO. [Operator Instructions] So with that, Scott, I'll hand over to you. Thanks.

Thanks, Simon, and thank you, shareholders, investors, anyone that's interested in our first half results that's dialed in today. We are pleased to take you through them. We look forward to getting questions at the end. In terms of the highlights of our business over the first 6 months of this year, you'll be aware that we've launched a new division called Bennji focused on commercial lending, which complements our existing commercial lending that goes through AFS. We're pleased to advise that the loan book there has exceeded $67 million. I think it's very much on track to be about 10% of our business by June 30. And that's loans in a commercial contract for small business typically to support them with their growth. And just to remind people, the Bennji brand that we launched is really trying to bring some different assets into our portfolio. It's probably more vans and light-construction equipment has come through where the existing commercial book was very much I think, dominated by Ford Ranger, Toyota Hilux and Isuzu. So we're pleased that, that has started to grow and continues to grow. We believe as we move from the initiation stage of our Bennji brand into now starting to ramp up with a number of brokers that the loan book should double by the end of March. So that's pleasing from where it started some 7, 8 months ago. In terms of New Zealand, just to remind shareholders, strategically have decided to wind up our business in New Zealand, repatriate the money back into Australia, and we're using that in two parts to fund the expansion of our commercial operation and also fund some special dividends that we've paid. We paid one in January. And as you'll see from the results, the plan is to pay another $0.025 special dividend on the 7th of April. We've heard the feedback from shareholders, particularly at the AGM around looking for ways to deal with our growing franking credit balance. We are lucky as an organization that we've had many years of profitability. And as we run down that portfolio in New Zealand, the Board has indicated that prioritize the payment of special dividends as a way of limiting the growth of those franking credits on our balance sheet. In terms of the operating performance, we had a very strong Christmas November and December, and that positive momentum has continued into January. I will admit we had a fairly slow start for the first 4 months of the year, the loan book did go backwards. But I'm really pleased with the result, 1.7% growth in portfolio. Anyone that's followed the Solvar story for some time would be aware that our businesses had some challenges to growth with New Zealand and issues with the regulatory matter that we've been dealing with, with ASIC. As these start to principally be behind us now, you can see some growth starting to return. And I look forward to the second half of this year and coming into '27 as the initiatives we've got in place around our commercial lending expansion of AFS and some Money3 focus and attention starting to see that loan book grow. Just reminding people that loan book growth drives revenue growth in our business. AFS business unit actually delivered the strongest first half start to a year that we've had since we've owned that business. Very pleased with the changes to the leadership management team we did in AFS. There's been lots of personnel changes, lots of software changes and people -- investors should start to see the benefits of that coming through in FY '27 as momentum picks up in the back half of this year. In terms of our earnings, up 13.5%. Normalized EPS is actually $0.104. I will let Siva go through normalization when we get to the capital management section, but we're very pleased to announce full half interim dividends of $0.11. And just to explain that in some detail, we paid $0.025 special dividend as a result of the sale of a written off loan book in New Zealand, which was paid in January. We have a normal interim dividend we're declaring today of $0.06 and then the Board has felt it appropriate given the repatriation of funds from New Zealand to declare an additional $0.025 fully franked special dividend, which will also be paid on the 7th of April. In terms of an update in terms of regulatory matters, we're almost at the end of this process. So just really, this is closing that chapter in our story. For those that would like to -- you can go to the Federal Court website and see the outcome handed by the judge. There's still a penalty hearing to go, but principally, most of the contraventions alleged by ASIC was set aside by the court in the judgment that was handed down in September. So that's -- I mean, it's been an unfortunate chapter in the business' history, but we are -- we feel that we've managed and made many changes to our business in this slide. We are very pleased that the outcome is now behind us, and we can move on. In terms of capital management, I mentioned the special dividend of $0.025 in addition to the $0.06 that will be paid on the 7th of April, and they are fully franked dividends, and we're pleased that, that has resulted from the rundown in New Zealand. Through the last 6 months too, we went to market in terms of our warehouse funding facility. So this is the debt that funds each of our businesses. Just to remind investors, we principally have 2 warehouses today. We repaid all of the debt in New Zealand with spare cash that the business had. So we did that last year and towards the back end of September -- or October, we renegotiated the warehouse for the Money3 business unit. So we have 2 warehouses today that fund the AFS Bennji and Money3 businesses. And as a result of that restructure, we created some additional headroom. There is a material saving in that senior cost of funding, which investors should expect to see the benefit of that flowing through next year. And we -- in our pricing committees now, we will sit and look to see about passing on this recent 25 basis point increase or whether we look to see how do we best manage volume versus margin. But we're delighted that we actually have quite a bit of flexibility there with the improving cost of funding as well as the additional headroom. And just finally, share buyback over the half, we acquired 5.3 million shares in the business. The Solvar Group now has roughly 189 million shares on offer today. As you would have heard at the AGM, the Board has chosen to change its priority in terms of capital management, slightly to the increased payment of dividends, particularly as the New Zealand business runs down. And at the moment, while the share price stays where it is, there's no -- the share buyback is on hold, and there's no intention to renew that when it rolls off. Just in terms of highlights of results, very pleased that after a period of contraction or going sideways in our businesses that we started to post loan book growth and nearly all of that loan book growth is coming in November and December. And I'm just highlighting that it did go backwards for a period of time. Both loan book and revenue out of New Zealand are now sub-10%. And as we move into FY '27, they are going to be an immaterial part of our business. In terms of concerns about how we may exit New Zealand, the partnership that we created that led to the sale of the written-off loan book gives us the confidence that there will be a clean exit as we also close that chapter on our business and that has actually accelerated this first half profit with net profit after tax normalized at $20 million. It's a very pleasing result, particularly underwritten by that sale of assets in New Zealand. In terms of cash collections, these continue to go from strength to strength, given our loan book where it has been 5% -- near 5% uplift in cash flow, I think, is indicative of the market. There is some cost of living concern, which is leading to some deleveraging from customers. So we have certainly seen very strong cash collections come through in the last 6 months, some of the strongest that the group has ever seen, given the relative size of the loan book. Origination growth is starting to pick up, which is very pleasing. Just highlighting the growth has all come in the last 2 months to make up for the contraction we've seen the slow start to the year, but that momentum continues into January and February. And we're pleased that we will be back to posting group loan book growth. You'll note today that we are just focusing on the group results. It has become increasingly difficult as we've moved roles out of New Zealand back to Australia to split that and I'm not sure that, that provides splitting between continuing and contracting businesses in New Zealand a lot of value there, given how small the contribution is for New Zealand. Bad debts at 2.9% is well below our target range. I just want to point out that it is there mainly as a result of the pull forward on the sale of the assets in New Zealand, but we are confident of staying within our target range of 3.5% to 4.5%. So investors should expect that to lift a little bit in the second half. Normalized net profit after tax of $20 million, a pleasing result driven a lot by cost management and the sale of the business in New Zealand. As a result of that sale, there are a number of people that will leave our business, a number of platforms and software. So in terms of our operating expenditure, it's probably running a bit higher than where we would like it to be. We note that it's lower than last year. So we're pleased with that. By the end of this quarter, a number of services that we have in New Zealand will start to be turned off, which is pleasing, which will mean that as we come into FY '27, the business will be a lot leaner and meaner in terms of its ability to execute on our vendor. Dividend, so a full interim dividend of $0.11 made up of those 3 components we discussed, as a result of the share buyback that we've been doing. Net tangible assets is now $1.70. Somewhat reiterating the items that we've discussed here, but quite a strong Christmas, which drove that loan book growth. We expect Bennji to continue to grow in its origination. We are confident of seeing the loan book in Bennji double between January and March, that momentum is strong. And as we move from a handful of brokers, I mean, we've been testing the product and the software with roughly 3 brokers and the Bennji team now is sort of expanding that and we look forward to seeing more growth coming through in that business. Interest expense is down principally because we repaid the debt in New Zealand. New Zealand, just a reminder, is now less than 10% of revenues, less than 10% of portfolio, and that will continue to decline as we move to June 30. Investors should expect to see interest expense improvement as relative to our debt, continue to improve into next year, although I do note that there's a forecast for more rate rises that gives us the ability to look at do we pass some of that savings to the customer in favor of volume or do we reprice our loans. We're still working through that in our business today, but it is good that we actually have the flexibility as a result of getting improved cost of funding last year. Bad debt levels are down from where they have been. And that is as a result of the sale of the assets in New Zealand. Employee expenses are down on last year. A lot of that is driven by New Zealand, but there is also -- as we look through what is a smaller Australian-focused business at the moment, rightsizing our organization for that, there are a number of people that will leave the organization by the end of this quarter, just as we do the rightsizing that will help drive improved operating expenditure and employee expenses into the new year. Technology is one line that we will continue to invest in. We've seen some of the challenges that our peers have faced. Just reiterating that investment has driven certification from ISO 27001 and an uplift in our record and retention policies. So we have put a lot of time and effort into improving the security of our customers' data and then managing that customer data such that it is only retained for the useful life of the business. We'll move on to capital management. I'll hand over to Siva now, and I'll give you an update in terms of the outlook.

Thank you, Scott. I think on capital management, as Scott covered before, there were a number of programs in place, starting with the buyback program that we did quite a bit, 5.3 million shares purchased in the last half. What you see on the graph on the left-hand side is a combination of different buyback programs over the last 3 years. The key takeaway point from our buyback as we had been doing this buyback at prices well below the NTA of the business, thereby maintaining the long-term value for the shareholders. On the dividend front, you would see that we had 3 lots of dividends, 2 special dividends and 1 interim dividend that's been part of this half year, which is the reason why it's gone about 100% payout ratio. As Scott mentioned earlier, the special dividends are more driven by the cash that is flowing back from New Zealand. And as you can see from this slide, we also are carrying over $50 million of free cash at the end of the financial year. That is sufficient to both pay the dividends as well as contribute to the ongoing growth of all the 3 business units. The third part of the graph, which is just showing the leverage of the business, the key takeaway point here is we are still moderately levered. There is opportunity to increase the leverage within the business which essentially means that we could continue to support the loan book growth without the need for additional equity. And with the ability to increase leverage, it also provides opportunity to fund acquisitions by releasing equity out of our debt warehouse structures. The next slide talks about the loan book quality and the debt facility supporting it. On the bad debt front, you'd see that we benefited through this one-off sale of the New Zealand written-off book, which keeps our bad debt ratio for the first half significantly lower. We expect that over the normal course of business, it will still be within our range of 3.5% to 4.5% that we have mentioned in the last few years. On the debt facilities front, the key takeaway point is we had restructured couple of our warehouse facilities in the Money3 business unit, providing significant headroom for growth. Similarly, in the case of AFS, there is again a reasonable headroom that is supporting the growth of the business overall the new structures that not only provide the headroom but also provides the opportunity to increase the return profile of the business by reducing the funder margins in each of those facilities. The third graph that you see, which is the loan book quality, this is the one that we have presented over the last few years in terms of how we perceive our receivable book within the business. And it is pleasing to note that the strong and the good has improved compared to the June position. And we will continue to take additional strategies to look at how we can continue to improve the loan book quality.

That's linked to the strong cash flow, isn't it, that we're seeing from consumers.

That is true. And also as the investors may appreciate as the Bennji and the AFS businesses start to have a bigger portion of our receivable portfolio, you would also see further improvement in the quality of the loan book. Hand it over to Scott on the next section.

So we reiterate our normalized net profit after the tax guidance of $36 million. We're very confident of hitting that number. We expect to maintain a similar dividend payout ratio as what we've been paying, assuming that things stay as they are today. And what we're seeing is growth in monthly originations in our portfolio. We're starting to take back some market share in our business, and we expect that to continue in the second half particularly Bennji and AFS have been going very well. I think the clear area that the resolution with the matter with ASIC provides some certainty around our Money3 business model that will help provide some positive momentum coming into the second half. Really excited about that with Money3. As I reiterated before, Bennji, we expect to double its loan book between now and the end of March. New Zealand rundown is very much in its final stages, and we look forward to FY '27 having very little to say about that because it will principally be done the same with the regulatory matter at foot. In terms of the market, we see a strong and resilient market. I think employment market is what I'm referring to. The benefit we have seen for that is strong cash flows. Probably the downside has been people paying out their loans sooner than we would like, but that is evidence that while we may deal with a higher credit risk segment. They are managing their debt through this current cycle and that it's pleasing. In terms of the automotive side, a lot of incoming questions about EVs in our business. We principally fund used vehicles. So we don't have much exposure to that. We are seeing used vehicles come down in price. We're seeing it improve the affordability. And we're seeing -- so average loan sizes are coming down a little bit, particularly in Money3. The benefit of that very much is that they are affordable loans. Most people typically borrowing $10,000 over a 3- to 4-year period is very affordable for people to maintain that payment. But that affordability does tend to drive volume. And on that matter, we'll hand back to Simon to answer any questions.

Thanks a lot, Scott. Thanks, Siva. First question, just regarding the legal matters. You mentioned a penalty still to come. What's the sort of magnitude you're expecting, please?

So the court will hear -- I think it's the 26th of February is when we will go to court. It's still -- I mean, the contraventions that were found by the court are quite minimal. I don't have a number to put on it at the moment. I do expect it will -- we will make an announcement in full time once we have an indicative range.

Can you please, even if roughly indicate which dimension of Bennji loss you're expecting to be included in the $36 million NPAT guidance?

Could you ask that again?

I think basically he is asking what's the loss associated with Bennji as a part of the NPAT guidance?

So do we expect the loss the financial year FY '26 to be less than $1 million in Bennji and just add one point to add to that comment, we are starting to see the loan book momentum building up quite strongly in Bennji. So we expect, one, the losses to be lower as we get into end of FY '26, but also particularly as we walk into FY '27, we expect Bennji to significantly compensate the gap that is going to be left by New Zealand. So that's going to be a very positive contribution to the overall group.

How much of that debt in AUD was backed out as part of the New Zealand loan book sale?

So in essence, included in the bad debt number is around AUD 8 million in terms of the one-off benefit that we got from the NZ sale. Having said that, part of the sale is essentially accelerating what we would have otherwise collected through the course of the financial year. On the AU front, there's a marginal uptick in the bad debts, but nothing alarming, but is more to do with the pace of loan book growth, as Scott mentioned earlier. And we expect as the book starts to build into H2, things will be back in the same normal zone that investors would have seen in the past.

What was the Aussie dollar equivalent at this time? About $7 million?

$8 million.

Just a couple of questions from Allan Franklin at Canaccord. Just noting your comments around stronger originations. Please, could you talk to market conditions in the Money3 segment. Have you seen competitors repricing following the RBA rate rise? And has this shifted demand at all?

Look, in the Money3 segment, we really see people reprice. I mean if you look at some of our other listed peers, the reason they're not repricing is because they're at the statutory cap of what they can charge. We haven't passed on that 25 basis point rate rise at the moment. The business that unit there operates at a NIM of around 17%. So it is quite a healthy NIM. And we're considering that in terms of net interest margin versus mix and volume. In terms of the competitive tension though, we haven't seen -- particularly for Money3, very different case for AFS target market, we haven't seen a lot of repricing from competitors yet.

Question around Bennji. Can you just talk to the early learnings from the product launch and are the broker introduced referrals a key to accelerating originations or just 1 part of the strategy?

For the first year, 18 months, brokers will be the key to the distribution strategy for Bennji. Software is the key, simple, easy execution is key. And what we've -- what we're finding is that the niche that we are able to carve out there tends to be a little bit of transport, a little bit of light construction. If you think can small mini mix for the delivery of cement trucks have been something that we've funded in that space. I think a Ford Transit van has been a typical asset that a Bennji consumer will finance. Given that we've only written around 300 loans, there's still work to go. And just to find there the team is focused on sort of 3 brokers and building a relationship with them and seeking out the relationships because it's -- there's a few parties involved here. There's the small businesses and who they interact with and plus the dealerships that provide the assets as well as the broker that's supporting those businesses. So I would say it's still early stages, but we've refined the product. We're focused on broker distribution, and it's ready to now try and drive some scale in that space.

Just last question. Can you just give us an update on how early post contributing to the business, perhaps give a little bit more rationale around the acquisition of 19.9% in Earlypay?

Yes, might be a little bit more now with the share buyback that Earlypay has been doing, but let's call it roughly 20% is what Solvar Group owns of Earlypay. As we sort of highlighted, our strategy is to broaden our market appetite for commercial assets as we look to grow the Solvar Group. And the strategic stake that we took in Earlypay is consistent with that message to broaden that market. At this point in time, we don't have an intention to increase our shareholding in the Earlypay business. And the benefit that is coming through to Solvar shareholders will be then any declared dividends that Earlypay pass on will come through our accounts.

Thanks a lot, Scott. That concludes the Q&A. I might just hand it back to you for closing remarks.

Thanks, Simon, and thank you for calling in today. Just to reiterate some of the highlights. Certainly growing Bennji demand. AFS had a record first half, and that momentum continues on into the second half. I think as we start to conclude and roll out some of our software upgrades in that business, we're excited to see that AFS takes more market share in that space. And in Money3, the Money3 business has been dealing with for a couple of years now, challenges associated with the matter with ASIC. As that concludes, I think we should look to see that business come back, particularly focused on those customers -- returning customers. And you should expect to see some growth coming through that business. Finally, just to reiterate, $0.11 interim fully-franked dividends with the inclusion of the special dividends. Thank you for listening in today, and we appreciate you taking the time to hear how the business is going. Thanks.

Thank you.