Consumer lender Fisher & Paykel Finance is being tipped to produce all 100% of its whiteware making parent Fisher & Paykel Appliances' first-half year earnings before interest and tax (ebit).
In a research report following F&P Appliances' update on its 2012 financial year outlook, UBS analyst Stephen Jancys predicts F&P Finance will contribute all the group's ebit in the six months to September 30 and 64% of ebit for the year to March 31, 2012.
Founded as F&P Industries in January 1934 by Maurice Paykel and his soon-to-be brother-in-law Woolf Fisher, the group is best known for the ovens, fridges, dishwashers and washing machines it makes. Medical devise maker Fisher & Paykel Healthcare was separated from the rest of the group and listed as a stand alone company 10 years ago.
Founded in 1973, F&P Finance started out with the primary activity of renting TVs under the F&P Dealer Rentals Ltd name. In 2003 it acquired the Farmers Trading Company’s finance and insurance operations in a NZ$311 million deal. Today, the finance arm is a much higher margin business than its parent. In the year to March the appliance operations delivered NZ$975 million in revenue but earnings before interest, tax, depreciation and amortisation (ebitda) of just NZ$56 million. In contrast, F&F Finance's revenue was just NZ$145 million but ebitda NZ$43 million.
In the first-half of the group's last financial year, F&P Finance, which has about 250 staff and operates the Q Card and Farmers Finance Card, delivered NZ$18.9 million, or 74% of group ebit. And in the full year to March it provided NZ$34.7 million, or 59%.
Jancys' prediction comes after F&P Appliances said last week that its first quarter result, combined with a weak retail outlook in Australia and forecast transactional hedging losses, was likely to see first half ebit from its appliances business at or slightly above breakeven.
F&P Appliances said the second half of the year traditionally provided the majority of the appliance businesses full year earnings, and it expects full-year ebit from its whiteware operations of between NZ$10 million and NZ$20 million.
''Soft' retail conditions
Meanwhile, the finance business was expected to experience soft domestic retail conditions, with these making only a marginal impact on earnings.
"Committed wholesale bank funding (from ANZ, BNZ and Westpac) is in place to ensure the repayment of maturing retail debenture stock in the lead-up to the expiry of the Crown’s (extended) Retail Deposit Guarantee Scheme on 31 December," F&P Appliances said.
F&P Finance managing director Alastair Macfarlane told interest.co.nz in May the company had about NZ$100 million worth of debentures due to mature before December 31.
"Full year operating earnings before interest and tax for the finance business are expected to be around NZ$32 million (down 7% year-on-year)," the group said.
That would see the finance operations producing between 62% and 76% of annual group ebit, which is tipped to fall between NZ$42 million and NZ$52 million.
Jancys says the main risk to F&P Finance's earnings is a rise in the Official Cash Rate from its current 2.5% level.
"This could result in lower margins if the costs can't be passed on," Jancys says.
Strong return on equity after failed sale attempt
F&P Finance delivered its parent shareholder an 18.4% return on equity (RoE) in the year to March, which is better than the 17.2% RoE the Commonwealth Bank of Australia owned ASB delivered in the year to June, which saw it post record net profit after tax of NZ$568 million . F&P Appliances managing director Stuart Broadhurst told interest.co.nz earlier this year that the group's failure to sell F&P Finance, which it put on the block in late 2007, was a blessing in disguise.
"Absolutely, it’s stating the obvious," Broadhurst told interest.co.nz.. "What we’ve been through in the last couple of years, it (F&P Finance) has been very supportive of the group. It has helped the group through very difficult times and I’m just thankful that we didn’t do that (sell)."
The tough times F&P Appliances has been through include breaching its banking covenants in May 2009 when its debt reached NZ$502 million, sales plummeting as the credit crunch spread, shifting much of its whiteware manufacturing (and jobs) to cheaper places like Thailand and Mexico from New Zealand, Australia and the United States and suffering asset write-downs and big losses. It ultimately bailed itself out through a NZ$143 million issue of new shares including selling a 20% stake to Chinese whiteware maker Haier.
One of just four entities covered by the extended Crown retail deposit guarantee scheme, F&P Finance stopped offering guaranteed term securities under the scheme in June - about six months ahead of the scheme's scheduled December 31 end.