Solvar Limited (SVR) Earnings Call Transcript & Summary

Good morning, and welcome to Solvar's FY '26 Results Webinar. From the company today, we have the Managing Director and CEO, Scott Baldwin, on the left; and Siva Subramani, company's CFO, on the right. [Operator Instructions] But with that, Scott, I'll hand it over to you.

Thank you, Simon, and thanks, shareholders, for dialing in today to listen to our FY '26 results. I'm pleased to say that FY '26 was very much a year of resetting the base, but we are delighted to have delivered on our profit guidance that we set at the AGM last year, increasing our normalized NPAT to $36.1 million, growing our earnings around 14.7% per share. The other thing that characterized FY '26 was the return to growth -- return to growth for the Australian business. The loan book closed in Australia at $920 million and continues to grow. June was one of the best months the group has ever produced in terms of settlements. And that's not just the Bennji Commercial business growing, but also complemented by AFS and the Money3 business all returning to quite good growth. I'm pleased to say that, that momentum has continued through July and continues in August as well. We've had good positive momentum coming into FY '27. Other things I'd like to call out on this page in terms of what characterized FY '26 is the proposed or our planned reduction of exposure to New Zealand is well underway. We had a very good result with the sale of the post write-off loan book in New Zealand, NZD 9.4 million agreed, NZD 8 million in cash paid, I must admit, this last financial year in FY '26, and that is progressing well. That loan book is coming down. You'll see it in the results here is only about $33 million. So it really is the end of that chapter for us. The other thing that we should call out is meaningful growth coming through our commercial operations. Loan commercial receivables for the group now exceed $109 million and growing, powered by the Bennji business. As we sort of highlighted to shareholders, we would be in a setup year in FY '26. But Bennji continues to move from setup to growth. It's now writing around $10 million a month. That will drive our loan book along with the growth that we've seen at AFS and Money3 towards that $1 billion, hopefully by Christmas this year. I know Siva and I brought that out just before COVID that, that was our aim. It took us a few years. We had some challenges, COVID being one of those, but we are well on track to hit that number by the end of the year. Why that's important is that loan book growth in the Australian operations will allow us to replace the revenue that was coming out of New Zealand in years to come. So that's a positive momentum there. The other key thing to call out in terms of achievements throughout FY '26 is sort of that reestablishing funding as an advantage for our business. You would note that we established a new warehouse. We also improved the margins in our facilities. We now have over $400 million of available funding to grow our business, which is -- which as you will see in the balance sheet as you read through the results this year have created quite a bit of surplus cash in our business, but we have been able to establish a very solid funding platform for which to grow from here. So apologies, a bit of a cold, but we are well placed to grow our loan book into FY '27 by leveraging the existing debt that we've got in place without the need for any additional capital. FY '27 and the future is going to be about creating operating leverage with what we've done. We've resolved our issues with the regulator here in Australia. We're not far away from the resolution of the matter in New Zealand. We have a strong funding base, and we have good momentum for growth. It is -- Bennji is leading our business units in terms of driving that growth. But pleasingly, Money3 has been consistently lately delivering more than $30 million a month and our other 2 businesses around $10 million. So that is driving our loan book growth. If we could go to the next page. In terms of highlight, we talked about loan book, $920 million. I think we'll -- we very much put out to our team driving that growth to around $1 billion by Christmas this year. Momentum is good in that regard. Interest income, this is the Australian interest income at $180 million. You'll appreciate interest income has been coming down in our organization as a result of the contraction of the loan book in New Zealand. We've hit the trough. It's now starting to grow again. As a result of the loan book growth that you'll see in Australia, interest income will lift in FY '27. Cash collections, amazingly strong, just evidence of a resilient consumer in this current market. If anything, cash collections are probably stronger than we'd like them to be. It's indicative of early redemption, early payout of customers, but a very strong result from our customer care and collections teams. Origination, $470 million. It's certainly our -- June, July were near record levels. For many investors that were at the AGM, you would appreciate we highlighted some of our challenges with our software rollout when we retired platforms at AFS, which essentially saw the first 4 months of FY '26, our loan book go backwards as a result of some challenges. We've turned that around in the second half. Second half growth has been very good with overall loan book has grown a little bit over 10% for the year. But if you look year-on-year in that second half, I think we are around -- in terms of originations in Australia, up around 40%. So that is now -- you'll start to benefit from that growth starting to come through. Bad debt. Bad debts were at the bottom end of our range. We just want to call out that, that is principally as a result of that one-off sale in New Zealand. But overall, Australian bad debts, which is predominantly the one that investors should focus on 4.4%, which is at the upper end of guidance, upper end of our target range and almost spot on to where we told investors in October, November last year, where we thought we would land. It is pleasing that our -- while our bad debts were at the upper end of the range, our arrears improved over the course of the year. So it does set us up to have a good FY '27. Normalized NPAT of $36.1 million. We'll step through that in another slide. Moving to dividends. This year, we declared -- as in FY '26, we declared 3 special dividends aligned with the rundown of the loan book in New Zealand totaling $0.075 and 2 ordinary dividends of $0.06 each for the interim and final year, bringing dividends paid to $0.195 for the full year. The next dividend to be paid in October is $0.085, which is a combination of the 2 there. Net tangible assets is $1.66. It is a slight reduction on last year, and that is a result of those special dividends and returning some of that capital back to investors as a result of running down our New Zealand loan book. The other place that we use some of those funds for was the share buyback program. We bought under the net tangible asset value of the business, which means EPS will improve for all the shareholders that are on the register today as a result of that buyback. While the program is in place, we don't have -- if the share price stays where it is, we don't plan to use that tool. We plan to leverage the special dividend in order to use up some of the franking credits that are sitting on our balance sheet, which has been the feedback that we got at the AGM last year and continues from a number of shareholders. Next slide, please. So this is the earnings bridge just in terms of what did we normalize. For shareholders that were at the AGM or have read the notice in November last year, these are the 3 core elements of normalization that we said we would have this year. We have resolved the issue with ASIC, which was the principal legal cost or one-off legal costs that was going through our business, including the penalty that's now being resolved, and we normalize that out. As a result of our rundown in New Zealand, we repatriated funds from New Zealand back to Australia, and we did crystallize some loss as a result of FX fluctuations there. And the other part is the -- is just normalizing out the setup costs of Bennji. Most of that cost is actually a noncash provision that we've taken up for impairment -- potential impairment of our commercial receivables. So that brings us back to $36.1. Next page, please, Simon. I'll hand over to Siva to take you through the financials.

Thank you, Scott, and good morning, everyone. Just to quickly summarize the income statement for the group. You'll notice that our interest income appears to come down. That is predominantly as a result of the rundown of our New Zealand book. But equally, our interest expense, bad debts and operating expenses have also come down. What's -- the thing to inform is we had an orderly rundown of our New Zealand book. The book is roughly $30 million at the end of FY '26. And going forward, you would see less of this distraction coming out of New Zealand on our P&L, and you will see more of the contribution coming from our emerging and growing segments in AFS and Bennji. And hence, the group results presented going forward will reflect more of the continuing operations predominantly in Australia. The 3 items that we have normalized to Scott's comments earlier were predominantly one-off. We did include the start-up investment cost of setting up Bennji. What we expect is Bennji's contribution to the income line will start to materially increase over FY '27 and beyond as the loan book starts to mature. We'll move on to the next slide. A couple of key callouts on this slide, you've noticed that the bad debts at a group level has come down to 3.6% to the comment made earlier, that reflects the one-off sale of the New Zealand write-off book. Notwithstanding that, we are still within our range of 3.5% to 4.5%. Probably the additional callout is that the Australian book continues to grow with Bennji and AFS contributing significantly to the loan book mix, we expect the trend of the bad debts continuing to go down over future years. The loan book quality slide on the far right also reflects a good picture to Scott's comment earlier, we had been quite resilient in our arrears management even though the inflationary struggles are still visible in the economy. What's pleasing to note is a strong and good part of the book has increased from 77% to 81% of the overall portfolio. At the same time, Australian leverage has also gone up from 71% to 74%, reflecting that the growth engines of AFS and Bennji are well funded. And you would also note that we have over $400 million in funding capacity that provides strong support for future loan book growth.

I think it's probably worth calling out because investors will bring it up, I'm sure, about our return on equity. So that -- we have the right foundation. Our return on equity is not where we want it to be. And you can see the programs we've got with the special dividends and the buyback helping with that. We know that we're carrying a large amount of cash. The leverage has been a contributor to that. It does give the business optionality to continue to fund in a tighter environment. And I guess, more than anything, we want investors to be aware -- we are well aware and conscious that over the course of this year, that cash that's come back on the balance sheet that we will use it appropriately, supporting dividends return and potential buybacks if needed, along with using that to grow our business. The positive is certainly the resetting of the base in terms of our funding and giving us that additional leverage for which to grow our business. So we sort of talked about some of these headroom. There is plenty of headroom to grow our business, particularly the Money3 business within our group. Talked about return on equity. We are very conscious about improving that over time. Just trying to call out on the dividend slide, the return of capital through special dividends and separate them out from our normal dividend so that you can see that the base dividend is a sustainable payment into the future and the buybacks that we've done through the course of the year. Next slide, please, Simon. The outlook. As I was saying earlier, we think we are well on track to exceed $1 billion of receivables this year. Loan book has been growing. The combination of Australia and New Zealand is now at $966 million, as you can see there. I think the Australian loan book was well past $940 million as we speak. There's good growth coming out of AFS and Bennji and a very solid performance, near record levels coming out of Money3 as well. So we see our loan book growth coming, returning to all parts of our business as some of our challenges with that software are now behind us as well as the closure of the ASIC matter. We expect to see interest income or revenue in a nonaccounting term, grow in a double-digit manner in FY '27. The leading indicator is the growth of the loan book. And you can see our loan book is -- as a portfolio yields around 20%, a little bit better. So you can see that growth will come back as a result of that -- the revenue growth that is will come back as a result of growing loan book, which is a positive in our business because we're very conscious of managing our operational expenditure ratios, which will improve through the course of FY '27. Lots of funding headroom. And as a result of a little bit more time on our hands, now we've actually been able to look at some other avenues of underserviced markets within Australia that we think provide opportunities to fund. In the appendix, you'll see some new assets that we have funded there, some of those -- some trucks as well as some other vans and other assets that we don't normally fund, but not a huge exposure in the book but driving some of that growth. In terms of operations, we are making a sizable investment in FY '27 into improving our platform that takes applications from the broker side or from a website. I think we talk about different parts of technology innovation that occurs every year. This is probably one of our bigger investments to try and change that platform really aimed at providing a better software base to which -- to leverage AI that is coming. We've had a few goals, as we've talked about, implementing AI, particularly around improving our recordkeeping, which is a big burden from a governance and compliance point of view in our organization. The more we can use AI to record conversations and to provide notes on accounts and manage the client interactions that we have on a daily basis, the better it will improve our productivity in our business. So a significant investment going on to retire more platforms and have a better software foundation for which to grow our AI initiatives on top of those. Just moving to the market. I'm sure it's not lost on most people attending call, we've seen record amounts of new car sales. A lot of that's driven by imports from China. We typically benefit in a delayed fashion in the used car market. Most of what the Solvar Group funds is used assets. And I think there's no coincidence that we're starting to see record levels of Australian originations coming through the group a couple of months after we've seen record levels of new car sales. We think that there is headwinds in terms of customers' affordability and market, which I think from a used asset finance company is benefiting us as our customers coming into our space is growing and our business is benefiting from that. So I think in terms of outlook, we think the market -- we're well placed within the market to have a really good FY '27. A number of the issues that we've talked about are now behind us, whether it's software, regulatory or some of our other issues that are there. Growth is returning to the business, powered by our commercial operations, but all parts of our business are benefiting. And we're investing in tools that will improve our productivity as an organization, which will result in higher EPS growth and better return on equity. With that, we'll hand back to Simon for any questions.

Thank you so much, Scott and thanks, Siva. Our first question comes from Allan Franklin at Canaccord.

Keen to just get a bit of a feel for Bennji through the fourth quarter. Maybe just a bit of detail on origination breadth, how are you going adding new brokers through the channels?

Well, a big part of Bennji was levering the existing distribution channels. And what we haven't wanted to do is bring on all broker partners at the same time. So part of that growth of origination is the team at Bennji starting to broaden, attend a few conferences, mainly from your other listed aggregators. That's where the volume is coming from pushing into our group. So it's -- there's a lot more brokers that we can add to the Bennji platform. We're just not ready for it at the moment. Our intent is to stay around that $10-odd million a month through Bennji while we continue to refine our underwriting models and just the other processes. So nearly all of the growth we have received is coming from our existing distribution partners.

Okay. Makes sense. And just on the loss experience in Australia in recent quarters, could you just sort of align the experience versus, I guess, your framing of lower watch list loans, I guess, that's coming out of the period?

Yes. Look, majority of bad debts do come out of the Money3 operation. And we have been through a number of loans with a view that where people are suffering some level of hardship writing them off earlier. And that is part of the contributor to overall portfolio quality improving through the year, which you could see in the previous slides. We think those same cost of living pressures continue through FY '27. But given our target range of 3.5% to 4.5%, I think we can manage those cost of living pressures and continue to meet the goals of the organization. But it is Money3 where most of that is coming.

Following. And just a last one on -- sticking with Money3, perhaps just framing pricing and competition in the market as it stands today. I think you do reference secondhand vehicle pricing getting a bit more palatable from your side of the equation. But yes, talk to pricing and competition within Money3 and how you're thinking about volume profit be.

Yes, there's been a bit of an uptick in volume, number of customers, but the average loan size has actually been fairly consistent over the last 2 or 3 years at Money3. So the growth that we're seeing is actually more customers and more customers will have a positive impact on yield. We have a static application fee. So if the loan size is lower, the yield will come up a little bit out of that. But Money3 has been a beneficiary of that. Long term, I expect Money3's bad debt experience to decline. Over the last 3 years, as you're aware, we've spent a lot of time with the regulator, and we've become a more conservative lender in that space as a result of that. And it takes a year or 2 before the portfolio flows through, but we expect to see Money3's bad debt performance continue to decline as we've shifted where our bulk of that business is exposed.

Next up, we've got Larry Gandler at Shaw and Partners.

Scott and Siva, well done on the excellent result for '26 and transition to a clean year. Just a couple of questions. With regards to the remaining New Zealand loan book, $30 million or so New Zealand, as those loans are collected, is it the intention to pay those proceeds out by way of dividends?