Greg and I have created the following video to introduce ourselves to all RHG shareholders.
Please take a look at it and let us know your thoughts by commenting below. [click to continue…]
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Putting together a CV to send over to RHG has been an interesting exercise. I haven’t applied for a job since my application to Macquarie more than a decade ago, and thought I’d never have to do it again.
It contains all the usual stuff: education, work experience, skills and interests. And irrespective of what I write, as Rebecca Urban put it in today’s Australian, ‘don’t hold your breath’ for the incumbent board’s support. But it’s an interesting exercise nonetheless. What do you, as a minority shareholder, want to see in the person representing you on the board?
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After a week of back and forth with RHG, we’re back (almost) where we started. The three resolutions we asked to be put to a special meeting of shareholders will now be heard at the annual meeting in November (you can download RHG’s ASX announcement here).
We’ve been keeping quiet the past week while we held discussions with CEO Glenn Goddard and a member of the existing board. We agreed prior to a meeting not to comment publicly about any of the discussions, but it’s now time to get back to convincing shareholders that we’re the right people for the job.
Over the coming weeks we’ll be posting a letter to all RHG shareholders and updating this site regularly between now and November 12. The response to date has been amazing, let’s make sure we keep the momentum rolling.
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We’ve received a long legal letter from RHG’s lawyers this morning outlining the ‘deficiencies’ in our requisition. The company did, however, offer an olive branch by agreeing to put the same resolutions to the annual meeting in November.
We have until 5pm Monday to agree or otherwise, and don’t want to say too much until we’ve explored our options. I’ll provide an update on Monday night or Tuesday morning.
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If I were advising RHG CEO Glenn Goddard on how to respond to our meeting requisition, the plan of attack would be simple: focus on their inexperience and make them out to be ‘corporate raiders’. We haven’t heard anything about inexperience, yet, but it will come.
The first salvo about capital allocation has already been fired, however. Goddard was quoted in this morning’s Australian as saying ‘These guys [us] are saying let’s cut this pie up, but what we have said is that this pie isn’t baked yet. Let’s wait until there’s more certainty.’ To be clear, we’ve gone to some lengths to point out that our strategy is not necessarily to return all the cash to shareholders immediately. If it takes 12 months, or two years, that is something we are perfectly comfortable with.
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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.
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