Dear Fellow Shareholder,
REQUISITION OF A GENERAL MEETING
This document is very important and may materially affect the value of your shares in RHG Limited (RHG or the Company). If you have any questions about this document or your investment in RHG, please call us toll free on 1800 620 414. We will be happy to answer all your questions.
Your vote will be important. RHG is owned by more than 9,000 small shareholders such as yourself. What you decide to do will affect what happens to your Company.
General Meeting to restore value to your RHG shares
On 7 September 2009, RHG shareholders holding more than 5% of RHG’s issued shares requested RHG to convene a general meeting. At the general meeting you will have an opportunity to vote on the makeup of RHG’s board. You will shortly receive a notice of meeting from the Company informing you of the date of the meeting.
We are proposing to remove one of the current directors and replace him with two directors more representative of the Company’s diverse shareholder base. If the proposal is successful, the two new directors intend to work with RHG’s three remaining directors to develop and communicate a clear plan for the maximisation of shareholder value. This will include, where possible, the return of excess cash to shareholders in the form of fully-franked dividends.
The proposed changes could have a significant impact on the Company so you should give careful consideration to the merits of the proposal.
Background
When RHG (formerly RAMS Home Loans) originally listed in June 2007, the Company was a mortgage origination business. Less than a month after listing, the overseas debt markets from which the Company obtained the majority of its funding collapsed . RHG was no longer able to source new funding, which meant it could no longer write new loans.
In November 2007, RHG sold the RAMS brand to Westpac and RHG shareholders were left with a $15.0bn mortgage book . These mortgages are held in special purpose vehicles which are not owned by RHG (SPV). RHG has a right (Future Servicing Right or FSR) to keep the difference between what these vehicles collect from their customers and what they must pay to lenders who provide the funding to these SPVs.
As it is in run-off mode, the mortgage book amortises as the loans are repaid and will, one day, be worth nothing. In the interim, this FSR is a valuable asset. As at 30 June 2009, the mortgage portfolio had been paid down to $7.7bn. But the profits being generated have increased the net tangible assets on RHG’s balance sheet from less than zero as at 30 June 2007 to $233.5m as at 30 June 2009, the last reporting date. This represents 72 cents per share based on the existing capital structure of the Company. This does not attribute any additional value to the $57m of franking credits that have also been accrued .
This increase in NTA as the mortgage book is run-off is illustrated in the following graph:
During the next five years, there is the potential for a further $120m of value, not including any return on the existing assets or attributing any value to franking credits. This calculation is based on the directors’ forecast profit of $55m-$65m for the 2010 financial year, and correspondingly lower profits in future years as the loan book amortises.
Problems with the existing board
The board does not have a strategy for returning these assets to shareholders, does not plan to do so, or has not clearly communicated its strategy to shareholders.
At the 2007 annual general meeting, just after the announcement of the sale of the RAMS brand to Westpac, Chairman John Kinghorn stated that ‘After meeting all liabilities and subject to its ability to refinance some of all of its warehouse and XCP programs, the directors intend to return all net income and surplus cash to shareholders over time’. Despite refinancing all of its funding facilities (with the exception of $1bn of loans sold to NAB in 2008) and generating a substantial amount of surplus cash, nothing has been returned to shareholders.
As at 30 June 2009, the Company had $47.9m in franking credits and $133.8m in unencumbered cash. RHG has enough resources to pay a $65m fully franked dividend (20 cents per share) and still have almost $70m to meet its tax liabilities support the remaining credit facilities.
At the 2008 annual meeting, Kinghorn didn’t mention returning excess cash to shareholders but did indicate that the Company may re-enter the Australian home loan market after November 2010. Neither strategy – returning the cash to investors or investing it in a new business venture – has been mentioned since. Investors are in the dark regarding what is to become of the existing and future assets accruing on RHG’s balance sheet.
The existing board is not functioning in a manner befitting a $170m publicly listed company.
The RHG board only has four directors. Despite being paid a total of $403,500 in directors’ fees, the board only held four (4) meetings in the 2009 financial year. Only one director, John McGuigan, managed to attend all four meetings and David Coe made it to half – a total of two board meetings in a full financial year.
Details of attendances at RHG board meetings in the year ended 30 June 2009 are as follows:
Director Number of meetings held
while a director Number of meetings
attended
JA Kinghorn 4 3
DR Coe 4 2
GK Jones 4 3
JV McGuigan 4 4
We cannot think of another publicly listed company with a market capitalisation greater than $100m that has given less time to their duties as stewards of shareholders’ capital. David Coe was also on the board of Allco Finance Group, which is currently in liquidation, and sold all of his shares in RHG in January of this year.
The proposed solution
We are proposing a reconstruction of the RHG board by:
1. Removing David Coe as a director.
2. Appointing Steven Johnson and Gregory Hoffman as new directors to the board.
See Appendix A for more information on the two new proposed directors.
The two new directors would work with the rest of the board to develop a clear strategy for the maximisation of shareholder wealth including, where possible, the return of surplus cash to shareholders in the form of fully-franked dividends or return of capital. Once developed, this strategy would be clearly communicated to shareholders, enabling you to make a fully informed decision about your investment in RHG.
The new five-member board would be more representative of the RHG’s diverse shareholder base and more appropriate for a company of this size and level of profitability.
Important Voting Decisions
At the general meeting, members will have the ability to vote each resolution independently. We strongly encourage other members to support the proposals to reconstruct the RHG board.
The three proposed resolutions are summarised below:
• RESOLUTION 1
That David Coe be removed from office with effect from the close of the meeting.
• RESOLUTION 2
That Steven Johnson be appointed as a director of the Company.
• RESOLUTION 3
That Gregory Hoffman be appointed as a director of the Company.
RHG Information Line
Please call our toll free Information Line on 1800 620 414, if you wish to discuss this matter further. Over the next month you will likely receive a response from the current board of RHG. You can ring the Information Line to ask questions about any of the information that you receive in relation to the future of your Company and our team will be able to assist you in understanding your options so you can make an informed decision. We’ve also created a website, www.rhgshareholders.com, which we will use to keep you informed between now and the meeting.
Yours sincerely,
Steven Johnson Gregory Hoffman
APPENDIX A: PROPOSED DIRECTORS
Steven Johnson – B. Economics, Econometrics and Finance (UNSW)
Steve is the Managing Director and Company Secretary of The Intelligent Investor Publishing Pty Ltd (AFSL 282288). He is also a Responsible Manager for the company’s Australian Financial Services Licence and sits on the compliance committee.
Steve has managed the day to day operations of the business, developed the company’s business plans, managed staff and been a key driver of The Intelligent Investor’s development. In addition to these management duties, he has played a key role in the company’s value-based research, with primary responsibility for infrastructure and finance stocks. Prior to joining The Intelligent Investor in 2003, Steve worked for Macquarie Group in Sydney, Vienna and London and worked on a number of large project finance and cross-border leasing transactions.
Gregory Hoffman – B. Business (UTS)
Greg is The Intelligent Investor Pty Ltd’s Research Director. He is also a Responsible Manager for the company’s Australian Financial Services Licence and sits on the compliance committee.
Greg manages The Intelligent Investor’s research team and is responsible for analyst development, the company’s research framework and has ultimate responsibility for recommendations. He has worked for The Intelligent Investor for nine years and has a wealth of experience in security analysis.
Dear Fellow Shareholder,
General Meeting to restore value to your RHG shares
On 7 September 2009, RHG shareholders holding more than 5% of RHG’s issued shares requested RHG to convene a general meeting. At the general meeting you will have an opportunity to vote on the makeup of RHG’s board. You will shortly receive a notice of meeting from the Company informing you of the date of the meeting.
We are proposing to remove one of the current directors and replace him with two directors more representative of the Company’s diverse shareholder base. If the proposal is successful, the two new directors intend to work with RHG’s three remaining directors to develop and communicate a clear plan for the maximisation of shareholder value. This will include, where possible, the return of excess cash to shareholders in the form of fully-franked dividends.
The proposed changes could have a significant impact on the Company so you should give careful consideration to the merits of the proposal.
Background
When RHG (formerly RAMS Home Loans) originally listed in June 2007, the Company was a mortgage origination business. Less than a month after listing, the overseas debt markets from which the Company obtained the majority of its funding collapsed . RHG was no longer able to source new funding, which meant it could no longer write new loans.
In November 2007, RHG sold the RAMS brand to Westpac and RHG shareholders were left with a $15.0bn mortgage book . These mortgages are held in special purpose vehicles which are not owned by RHG (SPV). RHG has a right (Future Servicing Right or FSR) to keep the difference between what these vehicles collect from their customers and what they must pay to lenders who provide the funding to these SPVs.
As it is in run-off mode, the mortgage book amortises as the loans are repaid and will, one day, be worth nothing. In the interim, this FSR is a valuable asset. As at 30 June 2009, the mortgage portfolio had been paid down to $7.7bn. But the profits being generated have increased the net tangible assets on RHG’s balance sheet from less than zero as at 30 June 2007 to $233.5m as at 30 June 2009, the last reporting date. This represents 72 cents per share based on the existing capital structure of the Company. This does not attribute any additional value to the $57m of franking credits that have also been accrued .
This increase in NTA as the mortgage book is run-off is illustrated in the following graph:
During the next five years, there is the potential for a further $120m of value, not including any return on the existing assets or attributing any value to franking credits. This calculation is based on the directors’ forecast profit of $55m-$65m for the 2010 financial year, and correspondingly lower profits in future years as the loan book amortises.
Problems with the existing board
The board does not have a strategy for returning these assets to shareholders, does not plan to do so, or has not clearly communicated its strategy to shareholders.
At the 2007 annual general meeting, just after the announcement of the sale of the RAMS brand to Westpac, Chairman John Kinghorn stated that ‘After meeting all liabilities and subject to its ability to refinance some of all of its warehouse and XCP programs, the directors intend to return all net income and surplus cash to shareholders over time’. Despite refinancing all of its funding facilities (with the exception of $1bn of loans sold to NAB in 2008) and generating a substantial amount of surplus cash, nothing has been returned to shareholders.
As at 30 June 2009, the Company had $47.9m in franking credits and $133.8m in unencumbered cash. RHG has enough resources to pay a $65m fully franked dividend (20 cents per share) and still have almost $70m to meet its tax liabilities support the remaining credit facilities.
At the 2008 annual meeting, Kinghorn didn’t mention returning excess cash to shareholders but did indicate that the Company may re-enter the Australian home loan market after November 2010. Neither strategy – returning the cash to investors or investing it in a new business venture – has been mentioned since. Investors are in the dark regarding what is to become of the existing and future assets accruing on RHG’s balance sheet.
The existing board is not functioning in a manner befitting a $170m publicly listed company.
The RHG board only has four directors. Despite being paid a total of $403,500 in directors’ fees, the board only held four (4) meetings in the 2009 financial year. Only one director, John McGuigan, managed to attend all four meetings and David Coe made it to half – a total of two board meetings in a full financial year.
Details of attendances at RHG board meetings in the year ended 30 June 2009 are as follows:
We cannot think of another publicly listed company with a market capitalisation greater than $100m that has given less time to their duties as stewards of shareholders’ capital. David Coe was also on the board of Allco Finance Group, which is currently in liquidation, and sold all of his shares in RHG in January of this year.
The proposed solution
We are proposing a reconstruction of the RHG board by:
1. Removing David Coe as a director.
2. Appointing Steven Johnson and Gregory Hoffman as new directors to the board.
The two new directors would work with the rest of the board to develop a clear strategy for the maximisation of shareholder wealth including, where possible, the return of surplus cash to shareholders in the form of fully-franked dividends or return of capital. Once developed, this strategy would be clearly communicated to shareholders, enabling you to make a fully informed decision about your investment in RHG.
The new five-member board would be more representative of the RHG’s diverse shareholder base and more appropriate for a company of this size and level of profitability.
Important Voting Decisions
At the general meeting, members will have the ability to vote each resolution independently. We strongly encourage other members to support the proposals to reconstruct the RHG board.
The three proposed resolutions are summarised below:
• RESOLUTION 1
That David Coe be removed from office with effect from the close of the meeting.
• RESOLUTION 2
That Steven Johnson be appointed as a director of the Company.
• RESOLUTION 3
That Gregory Hoffman be appointed as a director of the Company.
RHG Information Line
Please call our toll free Information Line on 1800 620 414, if you wish to discuss this matter further. Over the next month you will likely receive a response from the current board of RHG. You can ring the Information Line to ask questions about any of the information that you receive in relation to the future of your Company and our team will be able to assist you in understanding your options so you can make an informed decision. We will use this website to keep you informed between now and the meeting.
PROPOSED DIRECTORS
Steven Johnson – B. Economics, Econometrics and Finance (UNSW)
Steve is the Managing Director and Company Secretary of The Intelligent Investor Publishing Pty Ltd (AFSL 282288). He is also a Responsible Manager for the company’s Australian Financial Services Licence and sits on the compliance committee.
Steve has managed the day to day operations of the business, developed the company’s business plans, managed staff and been a key driver of The Intelligent Investor’s development. In addition to these management duties, he has played a key role in the company’s value-based research, with primary responsibility for infrastructure and finance stocks. Prior to joining The Intelligent Investor in 2003, Steve worked for Macquarie Group in Sydney, Vienna and London and worked on a number of large project finance and cross-border leasing transactions.
Gregory Hoffman – B. Business, Accounting and Finance (UTS)
Greg is The Intelligent Investor Pty Ltd’s Research Director. He is also a Responsible Manager for the company’s Australian Financial Services Licence and sits on the compliance committee.
Greg manages The Intelligent Investor’s research team and is responsible for analyst development, the company’s research framework and has ultimate responsibility for recommendations. He has worked for The Intelligent Investor for nine years and has a wealth of experience in security analysis. Prior to The Intelligent Investor, Greg held operation roles at Macquarie Bank, Royal Bank of Canada, NatWest Markets, Permanent Trustee and Coopers & Lybrand.
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{ 20 comments… read them below or add one }
I missed advising you that I hold 300,000 shares in RHG.
I fully endorse the stand that you are taking.
[Reply]
Fantastic. As an investor, I would like somebody on the board who will represent MY interests. I am more then happy to cast my votes for Greg Hoffman and Steve Johnson, I feel these guys are more then qualified to represent my interests, as well as the interests of the company.
A dividend from this cashed up company would be great guys – and well overdue.
Many thanks for taking the time and for also having the KA-hoonies to take this on.
Regards
Adam
[Reply]
Definitely supporting you guys! Seems like your initiative has made the stock that much more attractive for others too, going by what happened today. That speaks volumes about how shareholders are feeling about present management.
[Reply]
Well done Steve. It’s gratifying to see someone stand up for shareholder interests for a change. I’m tired of my holdings getting diluted by equity raisings that I cannot participate in on a commensurate basis and boards paying themselves ridiculous fees for keeping their shareholders in the dark about their intentions. I daresay your initiative will at least make some boards think twice about how to treat their shareholders. If ASIC doesn’t have the will or power to do something about these sort of shennaigans, maybe such grassroots action such as yours will give them some backbone for the future.
[Reply]
I sold my RHG shares – couldn’t bear the possible risk, because it seems to me the current directors have a secret desire to return RHG to its former ways of being a loan originator. Had I know you guys were going to take the board on, I would not have sold. Keep going at them. Winding it down and returning the money to shareholders is the way to go.
[Reply]
What sort of remuneration will Greg and Steve be asking for? Please say your services will be provided free of charge…
[Reply]
Steve Johnson Reply:
September 10th, 2009 at 10:48 am
We certainly won’t be doing it for free Steve but if you know someone who can do a better job and wants to fight the fight, one or both of us would be more than happy to stand aside. I don’t think it is going to be great fun.
[Reply]
Steve Reply:
September 10th, 2009 at 5:38 pm
Just so we’re clear, I applaud your actions here. I don’t doubt your competence or drive Steve – never have, never will. If we are to back you, I just want to make sure your motivation is as a shareholder and not as someone looking for a job. The current remuneration for Directors is very generous given the litte effort they put in. What compensation will you and Greg demand as Directors? As large shareholders, is the realisation of shareholder value not enough?
[Reply]
Steve Johnson Reply:
September 13th, 2009 at 8:44 pm
Thanks Steve, appreciate your support. I own a few more than 700,000 shares, so realising the value is far more important than any directors fees. And I already have a job that keeps me more than busy.
But I think that we should get paid and that the $80k in directors fees is not unreasonable. We’d probably return it to TII – at the very least to recover the legal and postage/printing bills – but that doesn’t make much difference, we own a majority anyway.
The remuneration is very generous given the effort current directors put in. But it’s the effort not the quantum of fees that’s the problem.
Well, I don’t believe Greg and Steven are doing it on a volunteer basis nor should they. If they can release the 25 cents of value difference per share to us (spread between market and book value), wouldn’t you say that’s director’s fees well earnt? As opposed to what Kinghorn and David Coe are collecting already. Kinghorn, I still wouldn’t begrudge on account of being a founder, but no mates’ rates please for David Coe.
Also please be aware that Kinghorn sits on the compensation/remuneration committee. Might be going out on a limb here but I daresay Steven and Greg won’t be getting sweet deals from Kinghorn anytime soon…
[Reply]
Here is a nifty link that tells you RHG’s compensation levels.
Goddard and Lonie draw surprisingly high salaries (in my opinion) for a 20-man company with such prospects.
http://investing.businessweek.com/businessweek/research/stocks/people/person.asp?personId=43919358&ric=RHG.AX&previousCapId=33609&previousTitle=RHG%20Ltd
I’m curious as to why David Coe is collecting so much more than the other board members (such as Kinghorn himself). Is it because he is an executive advisor? What exactly is he advising on – let’s blow away another motherlode of shareholders’ equity?
http://investing.businessweek.com/businessweek/research/stocks/people/person.asp?personId=8747223&ric=RHG.AX&previousCapId=33609&previousTitle=RHG%20Ltd
[Reply]
Thanks for taking this on TII.
I did have ~130,000 shares at one stage (sold down at 25c) but am now on 64,000.
If I could get a 1 cent dividend every 6 months (to keep me interested) and a total return (divs + CG) of 40c/share by 2013 I’d be pretty happy.
[Reply]
I only have a couple of thousand shares from memory. But for what it’s worth you’ll get my support. Kinghorn obviously sees this as his company, to do with as he sees fit. If he does choose to get back in to the loan business in 2010, you can be sure he wont consult with shareholders.
We are just an annoyance to him and sadly, this is not uncommon.
It would be useful to have an alternative point of view on the board. If only to utter the word “shareholder” at board meetings occasionally.
Good luck.
[Reply]
Good on you ! I fully support ensuring Directors act in the best interests of ALL shareholders. I also support any person or organisation that addresses the REAL problem of Directors awarding themselves excessive remunerations. You have my votes.
[Reply]
I own more than 1% of RHG (4mil shares +) and I fully support the actions taken by Steve and Greg. I also support their remuneration as directors considering the step they are taking is probably going to cost TII (I’m guesing here) upwards of $50k. I also suspect they will attend more meetings on my behalf as a shareholder than David Coe and some others did. Top all this off with what will no doubt be a hostile board room enviornment (catching javelins is not fun…), I don’t begrudge them one little bit.
[Reply]
I own 350000 plus shares and am in full support.Perhaps we can be an example to the investing community.The time is upon us to act in such a fashion
[Reply]
Fully support your efforts getting onto RHG board and hopefully returning some dividends and franking credits to shareholders. Of course you should get Directors fees if elected (the fees are due one way or another, it is not as if the fees are an extra cost)
[Reply]
Richard Reply:
September 22nd, 2009 at 10:32 am
Actually, if you remove 1 director and then appoint 2 new ones, directors fees will likely increase.
I think this is irrelevent though, if those directors are working for OUR benefit instead of their own.
[Reply]
Add another 2000 shares to your list. We need to somehow target all those shareholders in the float and other mums and dads who dont even understand whats going on, we need them to read whats happening. I really hope this works, not just from a financial point but from a principles perspective. Its criminal people get paid $400K for signing an attendence meeting.
[Reply]
Good luck gentlemen,
I have 30000 shares and look forward to receiving some advice on the direction and future plan for MY investment. The contempt we are treated with makes my blood boil. I also agree that you are certainly entitled to directors fees, I am sure this will be time consuming, and a difficult process.
Rgds,
Mal C
[Reply]
Go for it guys, you have my blessing. I support Steve and Greg for Directors and the removal of David Coe from the position.
[Reply]
Hi Guys
Just read the ASX announcement from RHG. Looks to me like they are (a) attempting to delay the process; (b) attempting to save Mr. Coe’s position on the Board; and (c) attempting to maintain a majority on the Board. Could be very frustrating for Steve and Greg to try to work under those conditions. I have no problem with the matter being dealt with at the AGM but believe the original resolutions should stand.
Regards Ron T
[Reply]
Totally agree with the sentiments held here – well done for taking on these guys. Will be voting for the removal (how can you be a director of a company you don’t even hold shares in and say it is in the shareholders interest). Don’t really mind when the meeting is, although the sooner the better for the company. Only having 1800 shares, I am a very small voice (if at all), however I want to see some direction for the company, to acheive growth and return if possible, rather than blow it all away and have 50c shares of a company which is would down to no value. Go Steve and Greg – hope you have no conflict of interest calls, and you are more than welcome to the remuneration. I am sure this will not make up for the frustration of getting movement as the minority on the board, but hope you can sway the others to grow the company
[Reply]
Good Morning Mr Johnson
I am a small shareholder of RHG of 6500 shares. I have been following this stock for a while now and have made a small profit which i intend to try and keep and increase if possible.
Thank you for what you are doing for this company.
Cheers Nigel
[Reply]