Managing Director's Report
FY09 Financial Highlights
Trust’s strong financial performance during the recent period of unprecedented turmoil is testament to its position as a leading independent trustee company with 124 years experience.
Our core measure of profitability – Operating EBITDA – was down only 8% in FY09, and within guidance. This result reflects the underlying strength of the business, its high levels of recurring income, its loyal client base and prudent cost control. The $4.4m in cost savings achieved in the year largely offset the $6.1m revenue impact of falling investment markets and led to a 2% increase in our operating margin to 34%.
Reported net profit after tax (NPAT) increased 2% due to a net contribution of $5.1m after tax from significant items. The sale of our 50% share in the securitisation joint venture with The Bank of New York Mellon for a total consideration of $39.2m resulted in an after tax profit of $13.9m. This was an impressive transaction completed eight months into the sub-prime crisis. It reflects both the good timing and the skilled structuring of the joint venture at its original conception by my predecessor Jonathan Sweeney. On completion of this transaction in June last year, shareholders received a special dividend from the after-tax proceeds of 100c per share, 70% franked. This caps a successful period of driving returns for shareholders through strategic transactions and non-core asset sales; in fact, shareholders have received significant returns through special dividends declared in four of the last five years.
Total ordinary dividends for FY09 amounted to 42c, fully franked. Adding the special dividend brings the total amount paid per share to 142c, an increase of 163% on the previous corresponding period.
The $13.9m after tax profit from the sale of BNYTA was offset by $8.8m in impairment and other charges. This includes the after tax impairment charges on our investment in two listed trustee companies, Equity Trustees and Tasmanian Perpetual Trustees. Preliminary discussions about a possible merger with Equity Trustees terminated in May 2008. We are confident our current investment in Equity Trustees will benefit us in the longer term. With respect to our investment in Tasmanian Perpetual Trustees, it announced a proposed merger with MyState Financial Credit Union of Tasmania Ltd in October 2008. We are waiting on the release of the scheme booklets to make a more comprehensive evaluation of this proposal.
Our operating cash flow remains very strong rising 10% to $20.8m, largely due to good working capital control. This demonstrates the strong cash generation abilities of the existing business. However, interim funding relating to the fraud in our Townsville branch resulted in funding requirements of $8.3m. In November 2008, we reported these irregularities to the market having immediately engaged forensic accountants to investigate. We set up a restitution account of $7m in December, which has been operated by an independent firm of solicitors for the benefit of all affected clients. This is to give them the utmost confidence in our commitment to honour all our obligations to them. We have been working closely with both clients and the forensic accountants to establish the exact quantums owed of capital and interest. In addition, the weaknesses in our systems that allowed this fraud to occur have been addressed. Our insurance claim is currently being assessed, with the matter expected to be finalised by the end of FY10.
Operational Highlights
The sound performance of the Institutional Services Division underpinned the performance of the Group as a whole. Within this Division, our Responsible Entity (RE) business won significant mandates during the year as orphan trusts sought out the services of a reputable and independent service provider. Our Property & Infrastructure Custody (PIC) grew with existing clients who started to enjoy the benefits of TRUaccess, our new online custody system. TRUaccess brings integrity and efficiency to our clients operations at a time when these two aspects are becoming central to the ongoing survival of business in the financial services sector. There is strong interest in this platform in the Singapore property market, as well as other classes of assets which are large and document intensive. We experienced resilient performance of the assets under supervision in our Institutional Business – up 4% during the course of the year. The bulk of this increase came from our PIC business; Superannuation and Structured Finance business assets under supervision fell in line with investment markets.
During the year, Asian operations were rationalised saving $0.8m in costs. We remain committed to the region, and the strong relationships established in this market by our leader in Singapore Andrew Cannane position Trust to benefit when market conditions improve.
In the Financial Services Division, the Health & Personal Injury business experienced a strong boost to new business of 66%. As part of our technology overhaul, or “Program Ben” initiatives, we completed a nation-wide project to scan 35,000 wills into a new database. This allows our estates and trusts team to deliver greater operating efficiencies, to build their client relationships from the extensive database, and to greatly reduce the business risk of losing documents held.
The balance of our Cash Management Trusts (CMT) in the wake of the Government Guarantee on 12th October 2008
illustrates the loyalty of our private clients. While other
non-bank institutions experienced a run on their cash deposits, our CMT held steady, and actually increased over the year
(refer to chart on page 10). Overall, however, assets under supervision at the year end had fallen by 24% to around $3bn in Financial Services Division due to the high proportion of equities.
Understanding the sensitivity of financial performance to investment markets is important for both shareholders and
the business in these volatile times. We estimate that around 40% of our revenues are insulated from asset value volatility. Our revenue is impacted by approximately $100,000 for every 1% move in the ASX200 index (at levels of 3500). The Institutional Services Division has a greater degree of insulation with around 50% of its revenues derived from
base management fees. In the case of Financial Services,
we estimate the proportion of revenues generated off fixed asset classes like cash is lower at around 30%.
Outlook & Dividends
As mentioned by the Chairman, we have altered our dividend payout policy from not less than 90% of operating NPAT to a target of 100% of reported NPAT for the current financial year FY10. The increase in the payout ratio to 100% reflects the fact that we currently have surplus capital for existing requirements, and the shift to reported NPAT implies that net significant items will be included in the calculation of FY10 dividend payouts. As capital management will feature in the strategic review, I will report back to shareholders on dividend policy before the end of
the current financial year. We have also suspended the DRP
as we have surplus capital to current requirements.
Given this alteration in dividend payout policy, we are providing guidance for FY10 financial performance at both the Operating EBITDA level for consistency, as well as the Reported NPAT level off which the FY10 total dividend will be struck. We expect
Operating EBITDA to be in the range of $13m and $16m; the key assumptions behind this expectation are an opening ASX200 investment market level of 3500; total investment market return of 5.5% for the year; an average fall in property market values of 10%; and lower investment and dividend income from our investment portfolio. We expect reported NPAT to be in the range of $9m to $12m, which includes net significant item expense levels of $0.5m to $1m after tax. Importantly, this range does not include allowance for any further impact from impairment, implementation of the uniform trustee legislation, or any further unrecoverable Townsville costs. We will update shareholders on our FY10 guidance at our Annual General Meeting to be held on 22nd July 2009 in Melbourne.
FY10 Work Plan
Our work plan is focused around three strategic themes which have informed our project planning and goal setting objectives for the year. The strategic themes we have chosen for FY10 are:
- Engage Our Stakeholders: establishing good communication with our clients to better understand their needs; opening up dialogue with our shareholders and potential investors; and setting clear expectations and performance measures for our staff. We also propose to use our philanthropic activities to promote greater engagement with our market and the community more generally.
- Focus on Growth: Growing the revenue line in areas that present immediate opportunities for us. You can get a better flavour from these opportunities in the Business Highlights section which follows this report.
- Strengthen the Core: clarifying our business model and underlying drivers, establishing efficient structures for business lines and core services, implementing better management information systems, and maintaining our
focus on performance management throughout.
Strategic Review
At the centre of our work plan this year will be a detailed strategic review of the Group’s culture, brand and strategy.
After 30 years of Sweeney family stewardship and in light
of the current global financial crisis, it is an opportune time for
a strategic review. This will cover an analysis of our existing business models (a project to clarify our existing business models called “Project Lego” has already commenced), analysis of the external landscape, a review of our brand and culture and
an efficient capital and dividend policy. This work will culminate in a Strategic Plan which we anticipate will be completed in time for the 1H10 result presentations in October 2009.
We aim to develop a vision for the company that aligns the aspirations of our key stakeholders, namely shareholders, clients and staff, as this will be critical for long-term success. There is significant potential for growth in the existing business from efficiencies and cross-selling, and we believe we can better leverage the opportunities presented in a number of key business units where we have a strong market presence and proven expertise. We want such “hidden gems” to be well supported and capitalised to keep our business revenues buoyant, and return for shareholders strong.
As a first step in releasing Trust’s potential, we have streamlined the management structure at the very top level. Vicki Allen has taken on responsibility for both the Financial Services and Institutional Services Divisions as of 1 March 2009. We want the Group as a whole to benefit from the cross-sell initiatives and improved team work that will flow from the business units working together in a more integrated manner.
|
