Happy with my maths on this one.
Quote:
Originally Posted by
percy
Above posted on 7-10-2016.
Bonds brought at $1 are now trading at $1.065.
And remain "well positioned."
And I thought that was a very kind offer from Peat.The trust brought via Macquaries.I did not buy any for myself as my Craigs broker did not have any.
Hello hello hello,I think Roger is trying to be a very naughty boy,buying 20,000 TNRHB at $1.065 this morning and trying to sell them at $1.40 this afternoon.!!..lol.
The hound would never admit to such a thing but he has been known to be a fairly cunning on the odd occasion. Rumor has it the cunning dog is keen for PLENTY more at $1.065 or less :D
Using the following inputs into my favored Black and Shoals option pricing model, (for which I posted a link earlier today) Strike Price $3.95, (must be at or above $3.95 to get greater than the stipulated 5% discount on share conversion $3.95 x .95 = $3.75) Stock price $3.74, (I am using the spot stock price here, others might use a VWAP over 30 days or longer), time to expiry is 620 days, volatility, I am using the same 25-30% rating used in the original independent valuation for which I also posted a link earlier today) and using a risk free rate of 3%, (some would argue using a lower risk free rate for shorter N.Z. Govt bonds) I get a fair value for the pure call option of 47.81 - 57.39 cents per bond depending upon whether one uses the 25 or 30% volatility.
Option pricing isn't well understood by many investors and I don't intend to dig deeper into the subject after this post other than to suggest if people are interested they have a look at the original independent report and then make their own enquiries of their broker or use their own option pricing model. There is a small dilution effect which is referred to in the original report, (new shares are issued) so this needs to be accounted for. Assuming everyone redeems their bonds for shares at the SP is above $3.95 approx. 6.8m new shares will be issued at $3.75 = $25.5m. There are currently 74.5m shares on issue so the dilution factor appears to be just on 9.1% (6.8 / 74.5). In my opinion as new shares are issued the pure call option value noted in the paragraph above needs to be discounted by 9.1% so using that Black and Schoals Option model after accounting for the dilution effect of new shares issued I see fair value of the bond at $1.435 - $1.52 using current spot price for Turners shares.
Inputting the same date using the lowest volatility at 25% and using a current share price of $3.50, (has been at or above this for 60 days) still gives $1.31 per bond adjusted for the dilution.
My conclusion...the market does not understand the value of the option carried within this convertible bond and appears to be pricing it as a pure bond only...well at least until the hound started bidding it up.
Luckily it has not collapsed yet - but there is still time
Nice to see this on a run but I would caution that I believe (you can believe different if you want :p) that it is way above any reasonable valuation (ie mine :) [$3.22 now, $3.55 in a year]).
Best Wishes
Paper Tiger
Disc: do not take the post title too seriously.
Updated Gut Instict thinking regarding Bond Value with shares now at ~ $3.60
Quote:
Originally Posted by
percy
Although I do not hold any, I think the convertible bonds are a very good investment,as Roger rightly points out,more upside than downside potential.
However my back of the envelope valuation is a lot lower than Roger's.
Maybe I would not pay any more than $1.08 to $1.10.
So before buying BYOR,on the conversion rate.
Quote:
Originally Posted by
percy
The bonds will be a great winner for you.
ps.Take a fresh piece of paper and rework the bonds conversion.
ie 10,000TNRHB will convert to 2,666 or 2,667 shares.
Threw out the Black and Schoals option model and did some fresh clean sheet thinking as you suggested above the other day and reluctantly have to agree with your first post above now that the SP has come down 30 cents in recent weeks. Realistically best case is those 2667 shares are worth say $5 = $13,335 which gives a 33.5% gain over 18 months....who knows I suppose it could theoretically be worth a bit more in Sept 18 more but let's not go there until they get some more runs on the board.
Worst case is they're issued at a 5% discount to vwap so provided you can sell them for what they're issued to you at the bonds give a 5% capital gain as a minimum.
The running yield at 6.5% is okay notwithstanding you have to pay a small premium to the issue price of $1.00. Anything you pay over $1.05 at present, (say hitting the offer at $1.065) is a cost of the effective option element, in that case 1.5 cents get's you a look at the possibility of making a capital gain, maybe 33.5% less the initial premium paid now 6.5% = 27% net gain if they're $5 or maybe 20% - 6.5%, net gain 13.5% if they're $4.50. To look at it that way you have to accept that you are okay with getting slightly less than 6.5% on the bond value of your investment for the next 18 months. Some people aren't okay with that and demand a circa 10% return for any type of investment that has a capital risk of any kind to it, (these bonds rank behind bank debt and the new collaterised debt obligations the company is issuing) and I can see their point of view but I am happy with 6.5 / 1.06 5 = 6.1% running yield.
Throwing all the option pricing theories in the rubbish bin for a minute, (some would say they belong there but I couldn't possibly comment) and using pure gut instinct I think with the shares where they are currently ~ $3.60 your assessment of no more than $1.08 - $1.10 which represents paying a real effective option price right now of 3-5 cents, (remember you are more or less guaranteed a 5% premium so paying $1.05 now is the low water mark in my opinion) for the possibility of a net capital gain of 13.5% - 27% in eighteen months seems about right. My calculations were originally based on a share price of $3.90 so with the shares having come down ~ 30 cents, (glad I sold my shares) in recent times one has to be more realistic about the option value. All that said at current prices in my opinion, convertible bonds on offer for $1.065, a real option cost of only 1.5 cents per bond, they're the better and more one sided investment, (have very limited downside).
On the other hand non risk averse shareholders might argue that getting the full gain from here $5 / $3.60 = 38.9% without paying any premium up front for their investment gives them a better potential return than the bond investor who stands to make a potential 27%. (Note SP needs to be at a 5% premium to the floor exercise price of $3.75 = $3.95 before bondholders start to participate in the SP uplift).
The recent 30 cent SP drop has dramatically affected the bonds value because effectively the entire move down was from just before the threshold at which point the bonds start enjoying SP capital gain.
In effect the bonds were a high conviction BUY when I was buying at up to $1.0825 when the SP was $3.90 but are just a BUY at $1.065 now with the SP at ~ $3.60.
Hope this almost endless ramble makes some sense to people trying to decide between bonds and shares.
DPC/TNR/TRA and implied borrowing Interest Rates
Interest is paid over a year and liabilities go up and down over that same period. The net interest paid, once the year has wrapped up, is a fixed amount. The 'average' amount of the loan on which that interest is paid is more nebulous. A crude way to estimate the average is to:
1/ Take the loan balance at the end of the financial year.
2/ Take the loan balance at the end of the previous financial year.
3/ Work out the average of 1/ and 2/
Take the known interest expense, divide that by the average loan balance (3 above) and you can calculate an implied interest rate paid over the financial year. This is what I have done to compile the table below. For the years 2014 and before, all figures come from the relevant year Dorchester report. For the years 2015 and beyond, the figures come from the 'Turners Limited' [TNR] (from FY2017 onwards renamed 'Turners Automotive Group' [TRA]) annual reports:
|
FY2011 |
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Interest Expense (A) |
|
$3.064m |
$2.928m |
$3.857m |
$7.381m |
$11.436m |
Total Liabilities |
$48.634m |
$49.932m |
$70.765m |
$52.630m |
$207,970m |
$232,491m |
Total Borrowings |
$9.197m+$15.666m |
$7.248m+$13.787m+$5.286m |
$22.784m+$10.857m |
$17.565m |
$156,995m |
$174,816m |
Averaged Borrowing Balance (B) |
|
$25.592m |
$29.981m |
$25.603m |
$87.280m |
$165.906m |
Implied Borrowing Interest Rate (A)/(B) |
|
12.0% |
9.8% |
15.1% |
8.5% |
6.9% |
Note that the significant drop in borrowings between EOFY2013 and EOFY2014 was largely because $10.857m of 'Optional Convertible Notes' (borrowings) converted into equity over that year.
So why is this information useful?
The FY2016 years interest bill was $11.436m. But what would happen if the interest rate on that increased to the same as that of the previous year (8.5%)? That would mean the interest bill would go up to
$11.436m x (8.5/6.9) = $14.088m
The difference ( $14.088m-$11.436m= $2.652m) adjusted by the 28% company tax rate ( $2.652m x (1-0.28) = $1.909m ) represents the amount that net profit for FY2016 could have gone down with those higher interest rates in place. $1.909m on $15.517m represents a 12% profit drop. It is those kind of headwinds that investors might be facing over the next couple of years that TRA shareholders should know about.
SNOOPY
Merging DPC and TUA early
Quote:
Originally Posted by
Snoopy
I will use my historical file information to 'merge' the old TUA (it was Turners Auctions) from 2012 (actual merger took place in late CY2014) with what was Dorchester back then so we have a few more years of historical information to create a track record of substance.
With the full 'Turners Automotive Group' result due out next week, time for some historical context.
The table below is my answer to the question: "What would the combined profits of 'Turners Limited' have looked like if the merger of DPC and TUA was in place back in FY2012?"
The financial years of DPC and TUA did not match up. However, TUA was definitely on a growth path before DPC took a cornerstone stake. So for FY2014, a financial year which for DPC ended on 31st March 2014, I have added the 1st July 2013 to 30th June 2014 financial year results for TUA. It seemed better to add the slightly higher (constructed) 1st July to 30th June 'annual figure', rather than rely on the lower January to December full year TUA figure 'as published' (Both options contain an unavoidable 3 month timing mismatch due to TUA and TNR having different reporting dates). This involved reconstructing results from the half year TUA reports, to time shift the published 'full year TUA results' forward by six months. The earnings results are generally expressed in EBIT terms as a starting point.
I have also assumed that the capital structure of DPC was in place for the whole period of analysis. This means that the total liabilities on the TUA balance sheet must be funded by borrowing at the DPC 'parent borrowing rate' (see my post 1398).
There are two years (FY2014 and FY2015) of 'Turners Limited' results, where 'Turners Auctions' is included as a equity accounted investment. I have removed this 'equity accounted investment income' from the 'other income' of 'Turners Limited' in both cases. Instead I have included the full year equivalent results of Turners Auctions in both instances, consistent with assuming everything was already combined by FY2012.
I am modelling all tax to be paid at a rate of 28%. Turners Limited is now paying tax at 28%, and, barring any unforseen lending market meltdown, will continue to do this into the future. Turners Auctions was paying tax at the 28% rate before the Turners Limited takeover. Dorchester was not paying tax because of previous tax losses being carried on the books. In my hypothetical 'early takeover' scenario, as shown in the table, I have ignored Dorchester's past tax losses (they are all used up today for future comparative purposes anyway) and assumed the combined DPC and TUA paid tax at 28% historically. It is best to do this if your objective is a fair comparison with present day earnings, undistorted by the effect of 'past tax losses' on 'historical comparative earnings'.
Five Year History of Turners Limited: Operational NPAT
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
EBIT (Turners Auctions :TUA) |
$7.342m |
$7.948m |
$9.117m |
|
|
less TUA Liabilities x TNR Interest |
$33.272m x 0.12 = ($3.993m) |
$36.423m x 0.098 = ($3.570m) |
$45.634 x 0.151= ($6.891m) |
|
|
equals EBT (Turners Auctions) |
$3.955m |
$4.378m |
$2.226m |
|
|
add EBT (Dorchester) |
($1.543m) |
($0.133m) |
$4.892m |
|
|
EBIT (Turners Limited) |
|
|
|
$26.387m |
$32.987m |
|
EBIT (Turners Auctions) |
|
|
|
$5.829m(*) |
|
|
add back Turners Auctions acquisition costs |
|
|
|
$0.675m |
|
|
Interest Expense (Turners Limited) |
|
|
|
($7.381m) |
($11.436m) |
|
less tax paid equity accounted TUA income |
|
|
($0.721m) |
($0.742m) |
|
less one off paper gain self-caused by TUA takeover |
|
|
|
($7.098m) |
|
equals EBT (DPC+TUA) |
$2.412m |
$4.245m |
$6.397m |
$17.670m |
$21.551m |
less tax at 28% |
($0.675m) |
($1.189m) |
($1.791m) |
($4.948m) |
($6.034m) |
equals NPAT (DPC+TUA) |
$1.737m |
$3.056m |
$4.606m |
$12.722m |
$15.517m |
----------
(*) 'Turners Auctions' was absorbed into 'Turners Limited' on 20th November 2014. This was during the FY2015 Turners Limited financial year which ended on 31st March 2015. Turners Limited FY2015 contained 365 days. For 234 of those days from 1st April 2014, 'Turners Auctions' was an equity accounted investment. Note 18 in Turners Limited AR2015 shows an equity accounted contribution to profit of $0.742m up until 20-11-2014. If we annualise this contribution, assuming a constant earnings rate throughout the year, then we get an annual earnings contribution from this 19.85% strategic stake in TUA of:
$0.742 x 365/234 = $1.157m (EBIT) for that 19.85% stake
This means that 100% of TUA must be making an EBIT of:
$1.157m / 0.1985 = $5.829m
---------
SNOOPY
P.S. Not entirely convinced my table is consistent, but it seemed to make sense as I was compiling it!
Buffett Test 3: Return on Equity (FY2016 perspective)
In case you are wondering where tests 'one' and 'two' went, I am completing them out of order. The net profit figures for the merged group I have taken from my post 1399.
We are looking here to see if we can apply a Warren Buffett style growth model to value Turners. We are looking for an ROE of greater than 15% for five years in a row, with one setback allowed.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
NPAT (Turners Limited) (A) |
$1.737m |
$3.056m |
$4.606m |
$12.722m |
$15.517m |
Shareholder Equity (Turners Auctions :TUA) |
$17.510m |
$17.811m |
$13.378mm |
|
|
Shareholder Equity (Dorchester Pacific: DPC) |
$26.167m |
$33.190m |
$74.052m |
|
|
|
Shareholder Equity (Turners Limited: TNR) |
|
|
|
$121.002m |
$129.812m |
Total Combined Shareholder Equity (B) |
$41.667m |
$51.001m |
$92.430m |
$121.002m |
$129.812m |
|
Return On Equity (A)/(B) |
4.2% |
6.0% |
5.0% |
10.5% |
12.0% |
|
It is clear that despite this indicator going in the right direction, Turners Limited have never achieved an ROE greater than 15%
Result: Fail Test
SNOOPY
Buffett Test 4: Net Profit Margin (FY2016 perspective)
We are looking here for a company's ability to raise their net profit margin above the rate of inflation, ~2% as I write this. A short term trend will suffice. A company does not have to do this every year.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
NPAT (Turners Limited) (A) |
$1.737m |
$3.056m |
$4.606m |
$12.722m |
$15.517m |
Operating Revenue (Turners Auctions :TUA) |
$77.552m |
$82.836m |
$97.065m |
|
|
Incremental Operating Revenue (Turners Auctions :TUA) |
|
|
|
$32.287m (*) |
|
Operating Revenue (Dorchester Pacific: DPC) |
$9.799m |
$19.162m |
$31.327m |
|
|
|
Operating Revenue (Turners Limited: TNR) |
|
|
|
$90.195mm |
$171.195m |
Total Combined Revenues (B) |
$87.351m |
$101.998m |
$128.392m |
$122.482m |
$171.195m |
|
Net Profit Margin (A)/(B) |
2.0% |
3.0% |
3.6% |
10.4% |
9.1% |
|
(*) The incremental revenue comes about because 'Turners Auctions' was brought under the 'Turners Limited' umbrella during FY2015. The TUA accounts were not consolidated within TNR until this point. The revenue added represent the 'pre-consolidation' revenue earned by TUA before the full takeover of the company was complete.
Over FY2015 and FY2016, the profit margin has been taken to -and consolidated at- a new level.
Result: Pass Test
SNOOPY