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Blue Chip Financial Solutions: Andrew Murray and Jonathan Woodhams

By Jenny Ruth

Sunday 7th May 2006

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 Jenny Ruth
Blue Chip Financial Solutions has just completed a $A20 million share issue in Australia, nearly $A16 million of that being new shares and the proceeds will be used to fund the company's expansion. The company reported an $8.4 million net profit for calendar 2005, up from $7.1 million in the previous nine months - the company says that historically its first quarter result is break-even so the previous result is a fair reflection of its annualised profit.

Sharechat: Why did Mark Bryers go from being managing director to an executive director and then re-appointed managing director?

Blue Chip Australia chief executive and Blue Chip Financial Solutions deputy managing director Andrew Murray: It is a bit mickey mouse. What we did in the middle of last year, as soon as we decided we were coming to a listed environment over here in Australia, we understood how big the opportunity was in Australia. My focus needed to be solely here in Australia in making sure we were leveraging our opportunity over here. The response over here, particularly from our distributors, has been very strong. My focus as CEO of Australia needs to be primarily here in Australia. It made sense from a board perspective to bring Mark back in as managing director as opposed to an executive on the board. Australia's bigger than we expected it to be.

SC: Does the structure of what you're selling in Australia differ from the New Zealand offering?

AM: The structure in terms of what we deliver to clients, in terms of a fully managed property solution, is the same. How we package that up, because of the different regulatory environment, can be slightly different. The Australian landscape is dominated by financial planners and accountants. We package specifically for them. In the New Zealand environment we primarily sell through our own distribution channels. The core product is the same over here in Australia.

SC: Why is being first mover in Australia an advantage?

AM: The key thing about being first mover in Australia is we get to build the brand here and be known for it. We get to really shore up our distribution channels before other players come into the market.

Blue Chip New Zealand chief executive Jonathan Woodhams: While it's first mover in Australia, it's based on our six years of experience in New Zealand.

SC:Have any other players entered the Australian market?

AM: Not to our knowledge as yet, but we're certainly expecting a few to be on our heels within the next two years.

SC: How are each of the businesses purchased last year performing compared to expectations?

JW: Obviously we can't disclose things that aren't yet in the market, but we're satisfied with their performance. We're certainly aware of our continuous disclosure obligations.

SC: Do Macquarie and CVC have any involvement other than as shareholders?

AM: CVC is a private equity player. It's invested in us purely as a shareholder. They look at us, as all good private equity investors do, and they see us as undervalued. They have no other involvement. With Macquarie Bank we have more of a strategic alliance from in product development and distribution platforms in both countries. We're aiming to do some things together. What sorts of things I can't say at this stage.

SC: What sort of financial services specialist are you looking to acquire? What sized operation?

AM: We aren't in the market right now. We certainly have our eye open. We don't have any acquisition targets at this point in time. It would be one that matches our core business and helps us expand our core business. We wouldn't have a particular size. It would depend on the operation.

SC: What are the implications for Blue Chip if the IRD rules against your alterations compensation scheme?

JW: We would prefer not to comment at the moment. We will certainly look after our clients. It's a product we haven't offered for 12 months and we haven't offered it in Australia. We don't consider the implications will be material.

SC: When do you expect to get that ruling?

JW:We're very satisfied with the Inland Revenue process. They came back and asked for further information from us. We've produced that. We're comfortable with where we are in the process. It's just one of those things we have to go through with them. We're hoping the Inland Revenue will come back to us within two months. Obviously, we're on their time table, but we're expecting to hear from them withint that period.

SC: Why have you included in contracts since April 2005 the right to reduce rent payable to clients if the rental market drops by 10% or more? Do you expect the Auckland rental market to weaken significantly?

JW:The prospectus makes it clear that we've also written into our contracts that increase rents by 3.5% to 4% per annum. That clause has got a compounding annual provision but with the proviso that if market rents fall by more than 10% we have the right to reduce the rent. Our experience over the last six years has been that we've seen annual growth in the rental market of 4%.

SC: What makes the company so sure that the shortfall between rents from tenants and payments to investors will be reversed?

JW: To understand the shortfall, it arises in the most part due to timing differences between settling the properties and getting tenants in. Normally, we find rents take a while to settle down before they start increasing. As a property manager acting on behalf of landlords, we spend a lot of time on closing the gap. Because our sales growth has been significantly higher - by way of example, we've sold 800 properties and over the next 12 to 18 months we will settle all of those 800 properties. Obviously, we didn't do 800 properties four and a half years ago. We have a higher percentage of properties coming on now into the portfolio which is when we experience the highest gap.

SC: So what you're saying is that the shortfall is a function of growth?

JW: Correct, and we actively manage it.

SC: The company had $350 million in properties yet to be delivered to investors at December 31. Has the company already booked income from those contracts?

JW: Yes. In terms of our revenue recognition policy, when we have an unconditional sale and purchase agreement we recognise the revenue. Settlement occurs anywhere from a month to 18 months. We expect to settle between 300 and 400 properties in the first six months of this year. In that number there are a couple of developments on which we're waiting to here whether they will be available.

SC: What percentage of revenue in 2005 was from annuity-style income streams?

JW: It was less than 10%. That's one of the things the board has been looking at in evaluating potential acquisitions so that we can add to that annuity-style revenue.

SC: What percentage of Bribanc's work is for third party clients?

JW: It's an area we've been working on for the last 12 months. Currently, around 45% of revenue is from third party clients which is obviously up significantly over the last 12 months.

SC: Why will your average property prices increase so swiftly? (The prospectus shows the average selling price of Blue Chip's properties will rise from $350,000 in the March 2006 quarter to $425,000 in the December quarter.)

AM: A big proportion of that is to do with the fact that, as the Australian business grows, the average property prices over here are higher. For example, the average price for Sydney property is around the $A500,000 mark. In Brisbane, it's around the $A400,000 mark. As the proportion of Australian sales increases, we expectat the overall average for the group to increase as well.

SC: What percentage of properties owned by client investors are due to be sold in the current year?

JW: Approximately 200 properties will come to the end of their first term this year. To date, we've exercised our option to purchase on approximately 50% of those. It's our right to acquire those properties. We do a property by property analysis. Some of them are retained to be sold on to investors and others are sold on the open market.

SC: Is any part of reported profits unrealised?

JW: No, they're not

SC: Why is the company's PE ratio so low?

AM: The reason why the PE ratio is so low is to do with our shareholder spread. The way the stock is working currently in New Zealand on the NZX is that it's quite an illiquid stock. We have a small number of large shareholders, Mark Bryers, CVC and Macquarie and these guys around actively trading their stock. Because of the reverse takeover, we ended up with a large number of small shareholders who held very small parcels of stock. A lot of those shareholders have come to us knowing very little about Blue Chip. We might have a shareholder with 500 shares who decides to sell them on any given day. It effectively has the impact of bringing our share price down on that day.

SC: Could it be a sign of the market's scepticism about the business model?

AM: No, it's not. When you think about the shareholders who have come in, CVC and Macquarie, I think they would say they're pretty astute as far as what's a good business model and what's not. We have a lot of people on the register who don't know much about the business. Part of our ASX listing is to ensure we get a block of shareholders in the Australian market who will give the stock some liquidity. A large number of retail investors and institutional investors have bought in. There's a lot of support for the business model in Australia. The PE is an unfortunate outcome of how the company was first listed back in 2004.

SC: How does the farm succession product work?

JW: It's a tailored solution that allows predominantly the parents to utilise the farm assets and cash flows in an investment through the Blue Chip product to realise capital growth and to pass that through to non-farm siblings without affecting the farm business. Traditionally, the parents are actually taking cash out of the farm to pay off siblings. They use the equity they've got in their farm to acquire our product. We structure it up so that it utilises the cash flows of the farm. It provides them with a succession product without having to sell off the property.

SC: Will the "fundamental uncertainty" clause in the auditor's report be removed in the next annual report?

JW: Certainly we hope so. Obviously, that's an issue for our auditors in 12 months time. Having acquired the Ingot business, we would expect that to come out.

SC: Why do you have former MPs on the board?

JW: We have them on the board not because they're former MPs but because they're businessmen in their own right. Both of them have significant experience in the development of small businesses and taking them through to listing.

SC: You have both personally bought properties through Blue Chip. Why?

JW: On my part, I want to have as part of my financial planning portfolio exposure to the residential property market. I'm busy and the Blue Chip product is a smart product which allows me to have a low-hassle exposure to that market.

AM: Like most people these days, I'm a really time-poor person. I have a financial planner who looks after the equities side of my portfolio and I want someone I can trust on the direct property side, people who can find property stock and manage it for me. Blue Chip is providing a great investment opportunity to me. I certainly don't want to be running around looking for property managers to manage my tenants for me. Blue Chip do a good job of that.

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