There is a perspective that you can look at it from both sides.
In good times people update their cars.
And in bad times they repair them.
Guess you can make money on both sides. Do Turners do repairs...didn't think they did.
Don't think they do, either.
But then - how much money would you invest into repairing a 20+ year old car (excluding vintage cars ;)?
Repairs on a very old car quite easily get more expensive than buying a newer car. Now - if its not economical to repair it, and you still need a car to get to work, what would you do next?
You've also got to consider the downtime and inconvenience of vehicle breakdowns especially for those people who are relying on their vehicles to get to / from work or for business meetings or who need to pick up kids / grandkids from school at defined points in time. Owning vehicles older than 15 years has significant downsides in my opinion, (albeit a given that depreciation has run its course). Autosure breakdown insurance is fine but there's no insurance for all the inconvenience and downtime just the cost of the repair less the excess of course.
Wish you could convince my parents of the downsides of owning older cars! Can't for the life of me get them to get rid of their two old clunkers and replace them with something newer!
Still, need to have the retirement village chat to them as well.....that's a whole another level of "discussion":confused:
Your parents are not alone.;From Turners Investor Presentation 27th July 2017,page 9.
Average age of a car in NZ is 14 years.
20% of cars [aprox 700,000] are more than 20 years old.
23% of NZ drivers say they are very likely or extremely likely to buy a car in the next 12 months.
It is also extremely likely I will be adding to our TRA holding this afternoon or tomorrow morning at $3.44.
The SP cannot get traction if major shareholders keep flooding the market with shares.
The very large sell down by Hugh Green family was always going to take time for the shares to find loving,caring homes.
I would think this parcel is just some one taking quick profits,from that sell down.
I have seen John Ryder sell out of Ryman very early on,Mark Stewart sell out of Ebos before they took off,so although I watch who is buying/selling I pay more attention to the actual company's fundamentals.
Milford again.?...lol.
Just received the contract note.Very please to get the number I asked for.
Yes very nice , as I have been watching the TRA sp, and was thinking of adding to our holding at over $3.50.
Funny thing the market,all the latest results for shares I hold have been great,and the bonus takeover for OIC a total surprise.
Just getting myself ready for the market to give me a good kick up the backside, and say you are still a dummy.!!!! lol.
Since the first year of the 'modern' incarnation of Turners in 2015, the breakdown between divisions in EBIT terms I have modelled as below.
EBIT FY2015 EBIT FY2016 EBIT FY2017 Automotive Retail $2.268m $9.392m $13.105m Collection Services NZ $4.907m $6.119m $5.932m Collection Services Aus $0.128m $0.005m -$0.038m Finance $9.504m $14.854m $13.984m Insurance $1.739m $2.617m $2.998m Total $18.547m $32.987m $35.981m
I have always like the balance the 'debt collection' arm(s) of Turners gives to the overall business. Put simply, if the loan market goes down, then we can expect a corresponding increase in debt collection activity. Since 2015, Turners have built up the automotive retail, finance and insurance sides of the business with acquisitions. However, the debt collection side of the business has not been built up. In FY2015 the Australian and NZ loan collection business made up 27.2% of the EBIT of the whole business. In FY2016 that reduced to just 18.6%, and in FY2017 the figure was down to 16.4%.
This means that Turners as a group has become less resilient to possible changes in the automotive market. A downturn in the automotive market will affect 83.6% of the business as 'automotive' 'finance' and 'insurance' are now very much linked.
I find it very curious that Turners have now a secondary listing in Australia when earnings from that market are minuscule (negative if you apportion costs the way I have). Are the Aussies really going to be keen to come in and help fund future expansion? Or is the Oz listing all part of some grandiose plan that is getting very far away from the core business here in NZ?
The growth of Turners is good. But the reduction in resilience needs to be watched.
SNOOPY
Come on Snoopy put your thinking cap on.
The Australian listing is not so Paul Byrnes can claim family holidays to Aussie as business fact finding trips.
Think little ChCh business Ebos, who do 80% of their $7 billion turnover, in Australia.
Do you think TRA will be doing 80% of their business in Australia in 10 years time,or would you guess 20 years?.No Australian business is going to accept NZ only, listed scrip as part payment.
Resilient? Downturns in the motor trade happen,but the trade recovers very quickly.The huge increase in vehicles over the past few years has grown the opportunites for TRA.
Vertical integration of vehicle imports,vehicle/equipment sales,finance and insurance,means TRA are a totally focussed business,which is further scalable in Australasia.
I would also point out EC Credit Control does not rely on TRA as a customer.The Australian listing will benefit their dealing with their Australian clients straight away.
ps.Most probably take Paul Byrnes less time to get to Brisbane or Sydney than Dunedin.Few more people there too.
If you have a great business model why not roll it out.!
After I added to my TRA holding yesterday, I looked at the trust I help out with's portfolio.The trust only had TRAHB [bonds].
We therefore added some TRA shares to the portfolio today buying at $3.51.
Hi Percy, sorry for the newby question, but how does this off-market buying work? Did you know someone was willing to sell below market value or will Craig's try to find a seller for you? Presumably this only works for large transactions? Anyway, good to see you're positive about this stock, so am I :)
Elles , a big shareholder decides to sell down quickly. They contact a broker,Craigs in this instance ; they work outa deal,price etc and ring around their clients offering them at a discount to mkt price, so you need an account and relationship with your broker at Craigs . I queried my guy late friday ,he said plenty there still, but not a big enough margin for me. Craigs make money by charging up to 1% commission.
A large private shareholder or an institution approaches a broker, with say 800,000 or 1mil shares to sell.In this case Craigs said they would sell them.Head office of Craigs then advises their brokers to find buyers. The brokers then ring their clients,usually clients who already hold shares in that company,as was the case here with me already holding TRA shares.Sometimes they sell very quickly,and you either miss out or get fewer than you wanted.That is why I said it was extremely likely I would be buying more. as I was waiting see if I got them or not.A case of first in first served.
The placement or line of shares is usually done at a bit of a discount to market price.In this case the price was $3.44 compared to market price of $3.51 /$3.52.
As I was looking to adding to my TRA holding it suited me.
Interesting, thanks for the replies. It's a good way to do it as otherwise they'd push the share price down trying to sell that much on market, so now both seller and buyer get a good deal. Nice.
Good point Percy. Yes if TNR are looking to acquire businesses in Oz, there is almost certain to be an element of 'share scrip' in the payment. The Oz market for used cars is rather different. I don't think they allow used imports from Japan as we do here. TRA in NZ sources a lot of their used car stock from Japan. But with the shutdown in local manufacturing in Oz, maybe this will change? Maybe TRA is looking to get in on the ground floor if/when import regulations change? Could be huge for TRA if they can crack the Aus retail market. Yet many kiwi retail companies have tried this in other product categories. The result is not always pretty.
Lots of stories in the media around the ever aging NZ car fleet. One thing you never hear mentioned is how good a fifteen year old Japanese car can still be. Is there really they same pressure to update your car as there once was. I can think quite a few fifteen year old cars (built in 2002) I would be happy to drive around in as my everyday transport. Not sure I could say the same ten, fifteen years ago.Quote:
Resilient? Downturns in the motor trade happen,but the trade recovers very quickly.The huge increase in vehicles over the past few years has grown the opportunites for TRA.
Yes absolutely correct. But the EC credit Control business is now less of the overall business than it was, in percentage terms. That was my point.Quote:
I would also point out EC Credit Control does not rely on TRA as a customer.
SNOOPY
20% of cars in NZ [approx 700,000] are more than 20 years old.
Average age of cars in NZ is 14 years.
Selling used vehicles in Aussie would give Turners profits on sales,finance and insurance.
Should they at any stage be able to import from Japan, would mean they are in the box seat.
EC Credit Control is only less of TRA's overall business, as the other divisions have grown by acquisition.
Good capital allocation. Profit on vehicle sales,finance and insurance.
Agree a 20 year old Jap car can still be great,but very few people hang onto their cars that long.Some people change ever couple or three years.Some at 50,000 klms some at 90,000 klms.
ps.You will note from their last presentation, they pointed out a large number of light commercial vehicles are coming to the end of their useful life.
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:
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 Interest Expense (A) $3.064m $2.928m $3.857m $7.381m $11.436m $11.350m Total Liabilities $49.932m $70.765m $52.630m $207,970m $232,491m $384,917m Total Borrowings $7.248m+$13.787m+$5.286m $22.784m+$10.857m $17.565m $156,995m $174,816m $265,889m Averaged Borrowing Balance (B) $25.592m $29.981m $25.603m $87.280m $165.906m $220.353m Implied Borrowing Interest Rate (A)/(B) 12.0% 9.8% 15.1% 8.5% 6.9% 5.2%
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 FY2017 years interest bill was $11.350m. But what would happen if the interest rate on that increased to the 6.9%? That would mean the interest bill would go up to
$11.350m x (6.9/5.2) = $15.060m
The difference ( $15.060m-$11.350m= $3.711m) adjusted by the 28% company tax rate ( $3.711m x (1-0.28) = $2.672m ) represents the amount that net profit for FY2017 could have gone down with those higher interest rates in place. $2.672m on $17.609m represents a 15% 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
Actually it works the other way.
The higher interest rates go, the better the margins for lenders,such as finance companies and banks.
The effect of rising interest rates depends on how competitive the particular lending market is.
1/ If Turners are not able to pass on any of their own 'borrowing interest rate rises' to customers, then their NPAT will reduce according to the rise in their underlying borrowing rate.
2/ If Turners are able to pass on exactly all their own 'borrowing interest rate rises' to customers, then there will be no NPAT effect from a rise in their underlying borrowing rate.
3/ If Turners are able to pass on more than their own 'borrowing interest rate rises' to customers, then the NPAT at Turners will rise.
I think vehicle finance is quite competitive. So I am not sure that you can jump straight to 'outcome 3' as a dead cert Percy. However, I should point out that I am not forecasting that 'outcome 1' will happen either. I am trying to quantify a possible reduction in profits should interest rate rises not be able to be passed on. Part of an exercise in assessing possible risks.
SNOOPY
I am modelling all tax to be paid at a rate of 28%. Turners Automotive Group is now paying tax at 28%, and, barring any unforseen lending market market meltdown, will continue to do this into the future. Turners Auctions was paying tax at the 28% rate before the Turners Automotive Group 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 Automotive Group: Operational NPAT
FY2013 FY2014 FY2015 FY2016 FY2017 EBIT (Turners Auctions :TUA) $7.948m $9.117m less TUA Liabilities x TNR Interest $36.423m x 0.098 = ($3.570m) $45.634 x 0.151= ($6.891m) equals EBT (Turners Auctions) $4.378m $2.226m add EBT (Dorchester) ($0.133m) $4.892m EBIT (Turners Automotive Group) $26.387m $32.987m $35.981m EBIT (Turners Auctions) $5.829m(*) add back Turners Auctions acquisition costs $0.675m Interest Expense (Turners Automotive Group) ($7.381m) ($11.436m) ($11.350m) less tax paid equity accounted TUA income ($0.721m) ($0.742m) less one off paper gain self-caused by TUA takeover ($7.098m) less Revaluation gains on Investments ($0.200m) ($1.229m) equals EBT (DPC+TUA=TRA) $4.245m $6.397m $17.670m $21.351m $23.402m less tax at 28% ($1.189m) ($1.791m) ($4.948m) ($5.978m) ($6.553m) equals NPAT (DPC+TUA=TRA) $3.056m $4.606m $12.722m $15.373m $17.849m
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(* => Note for FY2015) 'Turners Auctions' was absorbed into 'Turners Automotive Group' on 20th November 2014. This was during the FY2015 Turners Limited financial year which ended on 31st March 2015. Turners Automotive Group 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
--------
Supersleuthers will notice that I have now removed the 'investment revaluation gains' from the net profit figures for FY2016 (and used the same policy for FY2017).
SNOOPY
We are looking for a rising five year 'eps' trend. But one setback along the way is allowed.
FY2013 FY2014 FY2015 FY2016 FY2017 NPAT (DPC+TUA)=TRA (A) $3.056m $4.606m $12.722m $15.373m $17.849m Adjusted Shares on Issue EOFY (B) 27.396m 55.966m 63.077m 63.432m 74.523m Earnings Per Share (A)/(B) {D} 11.2c 8.2c 20.2c 24.5c 24.0c Share Price 31st March {C} n/a n/a $3.20 $3.03 $3.55 PE Ratio {C}/{D} n/a n/a 15.8 12.4 14.8
There was a hiccup in FY2014 as the company adjusted to its increased capital base. Nevertheless the rising 'eps' trend appears to have plateaued. Here is an example where there is significant divergence between the 'profit growth' and the 'eps' growth. It is the 'eps' growth that is the important figure for investors, not profit growth. Yet the second 'eps' decline is only 0.5cps, or within the margin of error if whole numbers were used. For this reason I am not prepared to say the rising 'eps' trend has ended.
Result: Pass Test
SNOOPY
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.
FY2013 FY2014 FY2015 FY2016 FY2017 NPAT (Turners Limited) (A) $3.056m $4.606m $12.722m $15.373m $17.849m Shareholder Equity (Turners Auctions :TUA) $17.811m $13.378mm Shareholder Equity (Dorchester Pacific: DPC) $33.190m $74.052m Shareholder Equity (Turners Limited: TNR) $121.002m $129.812m $171.716m Total Combined Shareholder Equity (B) $51.001m $92.430m $121.002m $129.812m $171.716m Return On Equity (A)/(B) 6.0% 5.0% 10.5% 11.8% 10.4%
Turners Limited have never achieved an ROE greater than 15%. The latest year deterioration looks unfortunate, but is connected to the timing of the capital raising.
Result: Fail Test
SNOOPY
P.S. The equity raising took place in October 2016, approximately half way through the financial year. This means the new equity was only available to work with from that date. This means a more accurate ROE figure could be obtained by simply using the 'average' shareholder equity between the two most recent end of year balance dates. Using this method:
ROE (2017) = $17.849m /($129.812m + $171.716m)*0.5 = 11.8%
That figure exactly matches the figure from FY2016.
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.
FY2013 FY2014 FY2015 FY2016 FY2017 NPAT (Turners Limited) (A) $3.056m $4.606m $12.722m $15.373m $17.849m Operating Revenue (Turners Auctions :TUA) $82.836m $97.065m Incremental Operating Revenue (Turners Auctions :TUA) $32.287m (*) Operating Revenue (Dorchester Pacific: DPC) $19.162m $31.327m Operating Revenue (Turners Limited: TNR) $90.195mm $171.195m $249.338m Total Combined Revenues (B) $101.998m $128.392m $122.482m $171.195m $249.338m Net Profit Margin (A)/(B) 3.0% 3.6% 10.4% 9.1% 7.2%
(*) 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 the profit margin has been taken to a new level. However, this seems to have been a one off jump as the net profit margin has been steadily declining since.
Result: Fail Test
SNOOPY
The four tests have been completed and the results are as follows:
Buffett Test 1 (post 1422): 'Top Three' position in chosen market. Result: Pass
Buffett Test 2 (post 1528): Increasing 'eps' Trend. Result: Pass
Buffett Test 3 (post 1529): Return on Equity > 15% for five years. Result: Fail
Buffett Test 4 (post 1530): Ability to increase Net Profit margin faster than inflation: Result: Fail
The most disappointing thing in comparison to last year is the deterioration in 'Net Profit Margin'. Some would say three down years in a row is the beginning of a trend.
FY2013 FY2014 FY2015 FY2016 FY2017 Net Profit Margin (A)/(B) 3.0% 3.6% 10.4% 9.1% 7.2%
Make no mistake that in absolute terms, a net profit margin of 7.2% is still good. But this statistic is based on actual profits to actual sales. So it is difficult to make the excuse that the net profit margin deterioration is just a timing issue in the overall expansion plan.
By contrast, the apparent deterioration in the return on equity: ...
FY2013 FY2014 FY2015 FY2016 FY2017 Return On Equity 6.0% 5.0% 10.5% 11.8% 10.4%
...very definitely is a timing issue. Because the equity on the books at the end of the year was not available to the company all throughout the year. Yet disregarding this, we are still well short of our investment goal of a 15% return on shareholder equity. ROE returns generated are not enough to ensure that Turners will be earning more than their cost of capital across the business cycle. Lot's of the 'right noises' coming from management of course. But:
1/ more leverage on the balance sheet, (my post 21 on Geneva/Turners/Heartland Story Thread) and
2/ the downside risk from rate rises on that total (my post 1524) and
3/ the wiping out of all tangible assets, (my post 1485) and
4/ the divisional imbalance caused by the much smaller growth in debt collecting compared with the other divisions (my post 1515) and
5/ the 'early listing' in Australia, when the only Australian arm is going backwards (loss making) after all head office costs are apportioned, and
6/ the unusually low provisioning for 'stressed loans' (loans monitored but not impaired), even if the 'impaired loan balance' looks under control (my post 1487) and
7/ the lower profit margins in particular (my post 1530).
are all causes for concern (from the perspective of this hound at least). To me the most sensible strategy for Turners for now is to consolidate and grow their NZ operations. Turners may be the largest pre-owned car retailer in NZ. But there is still plenty of room for growth in the home NZ market. Having said this, I will not be selling out of TRA any time soon. But I will be watching them very carefully.
The Buffett growth model cannot be used in this instance to provide a reliable valuation. This doesn't mean that TRA is necessarily a bad investment. In just means we have to find another method to evaluate the company.
SNOOPY
At the NZ Shareholder's Association Annual Conference in Wellington last weekend there was concern voiced to a presenter from NZX that there is a huge amount of off-market trading. From memory the proportion of off-market trades was in excess of 50% (probably by value).
The sentiment was that the off-market trading is bad, in particular for small retail investors.
Regarding your point about pushing the share price down -- well isn't that the point of an open trade market? If sellers outnumber buyers then that should be known to the market -- and ALL buyers can make the decision to buy or not.
Turners Auctions (TUA) + Turners Limited (TNR/TRA) FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 Modelled Dividend Paid {A} $2.506m $3.285m $2.131m No. Shares on Issue (TNR/TRA) {B} (*) 24.057m 27.395m 55.966m 63.077m 63.433m 74.524m Modelled Dividend Paid (cps) {A}/{B} 10.42c 12.00c 3.81c Actual Dividend Paid (cps) (**) 5c + 4c 6c + 6c 7c + 3c +3c 4c +4.5c Estimated Dividend to be Paid (cps) 3c +3c
(*) The number of TNR shares on isssue at the end of the financial year has been adjusted retrospectively for the 10:1 share consolidation. To see how the number of TRA shares on issue was derived refer to my post 1414 "Buffett Test 2: Increasing 'eps' Trend (FY2016 perspective): Preamble Part 2.
(**) The actual dividends paid by TNR/TRA over FY2015 and FY2016 were unimputed. This was because of prior losses incurred under the DPC/TNR/TRA structure. However, in my modelling the TUA group was already combined with DPC/TNR/TRA. Previous year TUA profits wiped out those previous year equivalent DPC/TNR/TRA losses. Under this modelled scenario, those FY2015 and FY2016 dividends would have been fully imputed. That's because looking at the combined picture, those prior offsetting DPC/TNR/TRA losses never happened. Further note that all dividends have been adjusted retrospectively to account for the 23rd March 2016 10:1 share consolidation.
From the above table the 'seven year average' dividend payout was:
(10.42c + 12.00c + 3.81c + 9c + 12c + 13c + 14.5c)/ 7 = 10.68c (net)
Average Gross Dividend Yield (based on a 28% tax rate) is therefore:
10.68/(1-0.28) = 14.83c
Using a capitalized value gross interest rate of 7.5% (see thread An Investment Story - Geneva/Turners/Heartland, post 40), this translates to a fair value share price of:
14.83/ 0.075 = $1.98
Turners closed on the market on Friday at $3.48. While everything continues to go well for Turners, I am not seriously suggesting the shares are only worth $1.98. The 'capitalized dividend valuation method' assumes no growth over the business cycle. And even if that assumption were true, the actual fair value of Turners would likely fluctuate around a $1.98 mean value, maybe up to around $2.40 when times looked good. Yet that high price still leaves us over a dollar behind the market price. One way to interpret that difference is to say that Turners currently carry a 'growth premium' of around $1. It is up to each TRA investor to decide if paying that $1 'growth premium' is justified.
The 27th July 2017 presentation to 'potential Australian investors' was an interesting development. Right at the end Turners quote the broker guidance for FY2018 earnings ranges from Net Profit Before Tax of $29M (Deutsche) to $32M (Credit Suisse).
Over FY2017 Turners Automotive Group made a NPAT of $17.674m. Annualizing that profit for the businesses acquired during the year (my post 1479) brings that figure to:
$17.674m + $1.026m + $5.440m = $24.140m
Assuming a tax rate of 28%, this equates to a comparative base for NPBT of: $24.140/0.72 = $33.528m for FY2017.
Can that be correct? At least two brokers are forecasting that underlying TRA profits will fall for FY2018? If you believe those brokers, that TRA share price of $3.48 at close on Friday is looking very hard to justify!
SNOOPY
With a little help from www.4-traders.com
Forecast NPBT of $29mil to $32mil works out eps of either 29.25.cps or 31,4 cents cps.
On current [from 4-traders] eps of 25.1 cps we can look forward to eps growth of either 16.33% or 25%.
Makes the current PE of 13.86 look rather modest.
Other than SUM and THL, I can not think of another NZ share where the PE ratio is lower than the company's growth rate.
Strong buy.
It's still my largest NZ holding at the moment, but as yet I haven't moved it to 'back the truck up' mode. Still unsure how much Hugh Green sell down overhead is floating around.
Usually I follow the TA + FA signals, but unlike THL which is in a great looking up trend. TRA's chart resembles a 3 day old party balloon forgotten in a corner of a room. :-)
Assuming a company tax rate of 28% (and remembering that the Australian debt collection business, if it makes a profit at all will pay tax at 30%), we can change the NPBT predictions into 'eps' figures as follows:
$29m x (1-0.28) /74.524m = 28.0cps
$32m x (1-0.28) /74.524m = 30.9cps
Current year was:Quote:
On current [from 4-traders] eps of 25.1 cps we can look forward to eps growth of either 16.33% or 25%.
$17.849m/ 74.524m = 24.0cps
That figure is based on the number of shares at the end of the financial year, whereas I suspect that 4-traders may be using a weighted average number of shares over the year. That would produce a higher 'eps' figure. Using my end of year share figures, I get a projected eps growth of between 16.7% and 28.8%. That is comparable to the 4-traders figures (actually a little higher). However, all of this 'growth' can be explained by the fact that Turners did not own either 'Buy Right' cars or 'Autosure' for the full year.
If we assume that Turners did own both 'Buy Right' cars and 'Autosure' for the full year, then FY2017 eps would have been.
$24.140m/ 74.524m = 32.3cps
I submit that this 'growth' that 4-traders is predicting is not real growth at all. The only reason why it looks like growth is because of the timing of last years financial acquisitions. Looking at a constant 12 month ownership period shows that expected profits for FY2018 are below the equivalent FY2017 period. IOW Turners is shrinking, not growing.
I would expect Turners to be growing due to rationalization of brands and back office facilities and more cross selling. Yet this is not being predicted by 4-traders. Perhaps the Auckland market property trends are now weighing on Turners? Do analysts predict a slow down in car sales, now that waiting in an Auckland traffic jam for your house price top go up is no longer a wealth creation strategy?
For a company that is not growing, a PE of 13.36 is too high. A PE of 10 would be more appropriate. If we take the most optimistic 4-traders projection, 30.9cps, this points to a fair value share price of $3.09 at best. At worst $2.80 looks fair. Suddenly last Friday's market close of $3.48 is looking rather expensive.Quote:
Makes the current PE of 13.86 look rather modest.
SNOOPY
However we work the eps figure, the fact is shareholders can look forward to excellent eps growth, which will enable TRA to keep increasing their footprint and dividends.
I have been looking some more into the 'interest income' received by Turners, because I want to re-evaluate my interest margin calculations for the Turners Finance division.
The following information is from the 'Segmental Information' in the respective annual reports.
Divisional Interest Revenue 2017 2016 2015 (from AR2016) 2015 (from AR2015) Automotive Retail $7.590m $7.261m $2.781m $0.101m Finance $22.907m $21.182m $16.661m $19.341m Collection Services NZ $0.013m $0.006m $0.006m $0.006m Collection Services Aus $0.0m $0.0m $0.0m $0.0m Insurance $0.875m $0.822m $0.718m $0.718m Corporate & Other $0.418m $0.448m $0.883m $0.883m
Readers can see that the FY2015 results were re-stated. Suddenly a lot more interest revenue was apportioned to the Automotive Retail division. This equivalent figure grew significantly in FY2016 and FY2017 as well. It is difficult to calculate a representative 'interest margin' when the 'interest revenue' figure gets moved around like this. Anyone have a view as to why management have pushed so much of their interest income across into the Automotive division?
SNOOPY
I have done a bit more sleuthing. If I look on p46 of AR2015, the following segment descriptions appear:
1/ Automotive Retailing (formerly Auctions & Fleet): Purchasing motor vehicles and commercial goods for resale. Remarketing motor vehicles, trucks, heavy machinery and commercial goods.
2/ Finance: Provides asset based secured finance to consumers and SMEs.
Contrast these to the equivalent segment descriptions found in AR2016 p40:
1/ Automotive Retailing (formerly Auctions & Fleet): remarketing (motor vehicles, trucks, heavy machinery and commercial goods) and purchasing goods for sale (motor vehicles and commercial goods) and related asset based finance to consumers.
2/ Finance: Provides asset based secured finance to consumers and SMEs.
The big change here is that 'asset based finance' can now be put into the 'automotive retailing' box or the 'finance' box. There appears to be no distinction, unless there is significance to that word 'secured'. If the word 'secured' is significant, then the Automotive Retailing arm could finance cars without any security, which seems unlikely. At the very least, if you were loaning funds on a car, you would expect to secure that loan against the residual asset value of the purchased car.
On p30 in AR2016 there is some useful information on defining 'interest income'.
"The effective interest method calculates the amortised cost of a financial asset or financial liability and allocates the interest income or interest expense over the relevant period. The calculation includes all fees paid or received and directly related transaction costs that are an integral part of the effective interest rate. The interest income or expense is allocated over the life of the instrument and is measured for inclusion in profit or loss by applying the effective interest rate to the instruments amortised cost."
It could be that Turners retrospectively decided that the Finance division should pay a 'loan finders fee' to the Automotive Retailing division for FY2015. Whatever fee was retrospectively allocated looking back on FY2015, looks to have gone up substantially (from 14% of the loan revenue in FY2015 to 26% of loan revenue for FY2016) in subsequent years. It could be that if the typical loan term was four years, then the Automotive Retailing segment pinched the equivalent of all the interest income for the first year. If that is the explanation, I think this severely distorts the groups declared finance earnings. To get a true 'finance' picture, it looks like I will have to add the 'Automotive interest revenue' to the 'Finance' interest revenue'.
None of this makes any difference to the overall TRA result, because the exercise I have described is just taking profits out of one segment and giving it to another. But when you are looking at how profitable the finance segment is, it is very disappointing to see such a large chunk of interest revenue shuffled off to another division. It means you can no longer take the finance division revenues at face value.
SNOOPY
Hmm...beginning get bit itchy on this one, looks like downward trend is in tact slowly and steadily...
The agm is not far away.It is on the 20th September.
I am expecting a further very positive outlook update.
Then we will have a better idea whether they will be looking for eps growth of more or less than the 25% I am looking for.
I have been doing some number crunching to try and see what the 'net interest margin' would be if Turners treated their finance company segment profits like other finance companies. In this instance the finance segment does not include the insurance or EC Credit businesses.
I have taken out what I see as 'cross subsidy' to the Automotive Retailing segment, and put that back into the finance segment where I think it belongs. It is not unusual for a finance company to pay a commission to acquire new business. IIRC Heartland had an agreement like this with PGG Wrightson, when Heartland bought out the 'PGG Wrightson Finance' unit. I would be happy to see the Automotive Retailing segment be paid an internal 'loan finders fee'. But a 26% odd 'loan finders fee' over the life of a finance loan seems very high to me. I would go so far as to say it is 'misleadingly distortionary'. This is why I am taking the 'interest revenue' out of the Automotive Retail business segment, and putting it back into the finance segment.
Interest Revenue (Finance Declared) {A} Interest Revenue (Auto Retail Declared) {B} Interest Revenue (Corporate Overhead Adjustment) {C} Total Interest Revenue {A}+{B}+{C} ({F}) Total Interest Expense {H} Receivables SOFY {D} Receivables EOFY {E} Receivables (averaged) {{D}+{E}}/2 ({G}) Net Interest Margin ({F}-{H})/{G} FY2015 $19.512m $2.781m $1.985m $24.278m 0.4895 x $7.381m $37.726m + $49.953m (*1) $142.827m $129.040m 16.0% FY2016 $24.417m $7.261m $0.115m $31.793m 0.5123 x $11.436m $142.827m $167.598m $155.213m 16.7% FY2017 $26.818m $7.590m $0.063m $34.471m 0.4122 x $11.350m $167.598m $207.143m $187.371m 15.9%
(*1) For FY2015 I have added on the financial receivables of Oxford Finance acquired on 1st April 2014 (the first day of FY2015).
There are those on this forum who salivate on how the likes of how the finance company 'Heartland Bank' can operate on a net interest margin of 4.5%. But my calculations indicate 'Turners Finance' operates on an underlying net interest margin of over three times that figure.
SNOOPY
A company that operates across disparate divisions can sometimes be better understood by seeing what happens when those divisions are separated out into virtual stand alone companies.
FY2017 (as presented) Automotive Retail Collections NZ Collections Aus Finance Insurance Corporate & Other Total As Declared (Check) EBT (as reported) $15.397m $6.006m $0.239m $10.156m $0.928m ($8.095m) $24.631m EBT (corp costs apportioned) $9.266m $5.590m ($0.071m) $9.306m $0.540m $24.631m Tax @ 28% ($2.595m) ($1.565)m $0m ($2.606m) ($0.151m) ($6.917m) ($7.057m) NPAT $6.671m $4.025m ($0.071m) $6.700m $0.389m $17.714m $17.609m
Note: Corporate costs have been apportioned according to divisional revenues.
That looks quite nicely balanced, particularly when you consider the new 'Autosure' acquisition will substantially boost insurance earnings in the coming year. But as an exercise, let's make the segment change to the finance market business, by transferring the interest revenue from Automotive Retail back to finance. This is representative of what Turners themselves did as recently as FY2015.
FY2017 (Snoopy adjusted) Automotive Retail Collections NZ Collections Aus Finance Insurance Corporate & Other Total As Declared (Check) EBT (as reported) $15.397m $6.006m $0.239m $10.156m $0.918m ($8.095m) $24.631m EBT (interest revenue adjusted) $11.936m $6.006m $0.239m $13.617m $0.928m ($8.095m) $24.631m EBT (corp costs apportioned) $6.046m $5.590m ($0.071m) $12.527m $0.540m $24.631m Tax @ 28% ($1.693m) ($1.565)m $0m ($3.508m) ($0.151m) ($6.917m) ($7.057m) NPAT $4.358m $4.025m ($0.071m) $9.019m $0.389m $17.769m $17.609m
Suddenly the picture looks less balanced, with finance making up over 50% of the group's profits. It also highlights the contribution of the NZ Debt collection business, which in reality contributes almost as much to the bottom line as the much higher profile 'Automotive Retail' segment. Once corporate overheads are tacked onto the Australian debt collection unit we can see it is not profitable, an observation I find surprising. I do hope that Turners management know what they are doing over there.
I wonder how vulnerable the business is to the Auckland property slowdown? Will the Auckland car market, that Turners have so heavily leveraged themselves into with the 'Buy Right' cars acquisition hold up? Remember that profits can fall in Automotive retail by $1.026m and yet still remain flat on the books, because 'Buy Right' cars was not owned by Turners for all of FY2017.
SNOOPY
Just in case I suddenly disappear under a bus and my posts become incomprehensible, this is the record of how I have handled this 'tricky situation.' It involves looking at the earnings and revenue from 'Automotive Retail', as declared in the FY2015 and FY2016 (referencing FY2015) annual reports for the same 'Automotive Retail' division.
Automotive Retail FY2015 from AR2016 {A} from AR2015 {B} Difference {A}-{B} EBT FY2015 $3.145m $1.877m $1.268m Interest Revenue from Automotive Retail FY2015 $2.781m $0.101m $2.680m
=> ratio of incremental EBT to incremental 'Interest Revenue' = $1.268m / $2.680m = 0.4731
OR
=> ratio of incremental 'Net Profit' to incremental 'Interest Revenue' = (0.72 x $1.268m) / $2.680m = 0.3406
I then use this same ratio to extract a profit from the extra revenue in subsequent years. If you think that sounds like a dubious extrapolation to make for those subsequent years, then you are probably right. However, with no disclosure of the actual profit from financing put into automotive retail in FY2016 and FY2017, this is the 'best guess' effort that I can calculate.
SNOOPY
P.S. Sometimes an analyst can be carried away with the numbers, chanting the mantra that more complicated is always better. In this instance I have to ask the question, what is the meaning of the $101k of 'base interest revenue' assigned to the Automotive Retail division in FY2015? I don't believe it has any particular importance or significance, and it may very well change from year to year in a way that is not predictable. I therefore intend to ignore this figure as a separate entity and 'roll it up' into the one interest revenue total of $2.781m.
=> ratio of incremental EBT to incremental 'Interest Revenue' = $1.268m / $2.781m = 0.4560
I have used this ratio to make an estimate of the incremental EBT generated by these Interest Revenue cashflows in subsequent years:
FY2016: 0.4560 x $7.261m = $3.311m
FY2017: 0.4560 x $7.590m = $3.461m
I have added the incremental EBT earnings and revenues to the 'finance segment' and removed them from the 'automotive retail segment'. That creates a zero sum result on the overall revenues and earnings.
Snoopy,
What are you expecting EPS to be for FY18?
Any rationalization of brands and back office facilities and more cross selling, plus a recovery of the insurance business should see an 'eps' even greater than this. However, I am assuming a continuation of the current buoyant market for second hand vehicles. A slowing of the housing market could affect eps negatively.
Answered in my quoted post above.
Calculation of profit for "Buy Right' cars and 'Autosure' for the full year FY2017" is my projection for FY2018 (32.3cps). And that figure is higher than any of the analysts on 4-Traders pick.
Calculation of the incremental profit gain shown in my post 1479.
The real question though is what happens in FY2019? There is no doubt that Turners has performed well. But with everything delivering above expectations today, what will happen if the Automotive market slows to 'normal'? We shareholders get a triple hit of:
1/ lower auto sales and
2/ lower associated finance sales and
3/ lower insurance sales.
In those circumstances, how can a PE of 14 looking out into the FY2019 year be justified?
SNOOPY
But that is the risk in this type of business right. There might not be a slowdown and we will get another booming FY19 which we can then say the current PE is looking good. I still think looking at the future TRA is looking good for further EPS growth. Lets see what they say at the meeting in a few weeks time.
If they start to diversify outside of Automotive for the next few years, is there anything else that you would consider that would not justify a PE of 14?
The car market will go up and down. When it is up, I would expect a lower PE because of the expectation of a medium term slow down. When it is down I would expect a higher PE in anticipation of a medium term recovery.
I am aware that the market under the 'Turners' banner is now muddled as it contains more commercial vehicles. The commercial vehicle market and private vehicle market do not always operate in tandem. I am also aware that Turners operate in the used vehicle not the new vehicle market. 'Turners Auctions' in the old sense you might expect to lag the new vehicle market, because new vehicles are the upstream feeder of the second hand market. I am not quite sure how the 'Buy Right Cars' acquisition in particular or selling more second hand cars direct to the public in general affects this picture. I would guess that in a downturn, people who buy a new car might just hang onto it a bit longer rather than 'trade down' to a new 'second hand' vehicle.
The second hand vehicle fleet in NZ is old, but that is no guarantee that there will be pressure to lower that average vehicle fleet age. A fifteen year old Japanese car may have only done 150,00km. With careful servicing an owner might expect to eke out 300,00km from such a vehicle. Try that in your Ford Cortina or Morris Minor from a bygone era.
I agree. There is no need to panic.Quote:
I still think looking at the future TRA is looking good for further EPS growth. Lets see what they say at the meeting in a few weeks time.
They are already diversified outside of Automobiles with the EC Credit Control collections business! Ok, I suppose they might give the job of chasing up recalcitrant car loan payers to EC Credit. But EC Credit, if anything should be negatively correlated to 'Automotive Retail' ( IOW when Automotive Retail and the associated finance does badly, then EC Credit should do well). I like business arms with a negative correlation to the primary business, because this should help smooth profits over market cycles.Quote:
If they start to diversify outside of Automotive for the next few years, is there anything else that you would consider that would not justify a PE of 14?
I don't have a problem with Turners getting even deeper into Automotive Retail and all the associated finance and insurance though, as a matter of principle. But this brings in a greater cyclical business risk. And that should mean a more conservative balance sheet. I am not seeing much conservatism on the balance sheet of Turners at the moment.
SNOOPY
To expand on this, my standard debt measure is something called MDRT or 'Minimum Debt Repayment Time'. This is a figure in years which is the answer to the question:
"If all normalised profits for the year were channelled into repaying 'net company borrowing debt', how many years would that take?"
For FY2016 the answer was as follows:
MDRT Turners Limited FY2016
[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($109.327m+ $42.300m + $23.189m) - $13.810m] / [ $15.573n + 0.72($1.041m) ] = 9.8 years
At EOFY2017, this figure has somewhat blown out.
MDRT Turners Limited FY2017
[(Parent Bank Borrowings) + (MTA Borrowings) + (TNRHB bonds)) - (Cash)] / [(Net Profit) + (Impairment Adjustment)]
= [($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $16.261 ] = 12.1 years
I don't usually like putting 'fudge factors' into these calculations. But in this instance, with the purchase of 'Autosure' right at the end of the financial year, and no earnings contribution received, I will 'fiddle the result' so you can see what difference it makes.
If we look at 'annualised earnings', including a full year contribution from 'Buy Right cars' and 'Autosure' (my post 1479), then we can argue NPAT should be:
$16.261 + $1.03m +$5.44m = $22.731m
[($191.565m+ $49.021m + $25.561m) - $69.069m] / [ $22.731m ] = 8.7 years
So maybe the debt repayment picture isn't so bad? Even so, I wouldn't call 8.7 years a low figure. The TRA balance sheet is, IMO, being worked pretty hard.
SNOOPY
My voting form for directors piqued my interest in the composition of the TRA board. Three directors represent significant shareholdings.
Paul Byrnes: owns 4.44% of the company.
Grant Baker: represents 'Business bakery' that owns 16.34% of the company.
Alister Petrie: represents Bartel Holdings, owning 9.05% of the company.
Next we have
Matthew Harrison: former MD of EC Credit Control, now a Turners subsidiary.
John Roberts: former Veda Advantage (debt collector) senior executive.
Antony Vriens: former DPL Insurance executive, now a Turners subsidiary.
I don't question the competence of any of these board members. They all look like fine appointments considered on their own. But it does strike me as extraordinary that there are no independent directors with historic expertise in either the automotive retail industry or the finance industry. I don't begrudge significant shareholders a voice on the board to push their own barrow. But I do worry that there seems to be no-one independent on the board with automotive/finance experience to question whether that barrow is really being pushed in the right direction. It looks like a board of yes men to me. I hope I am wrong.
SNOOPY
What's going on. 3.36 now.
Average EPS estimate off 4 traders for FY18 is 29.2 cps and for FY19 is 31.4 cps.
At $3.45 this morning that puts the stock on a prospective FY18 and FY19 PE of 11.8 and 11 respectively compared to a market average forward PE of close to 20.
I think much like HBL you have the wrong end of the stick with this one. Population growth will continue with immigration and when cars get to 15 years old they become like a nagging wife, there's usually one problem after another after another...people will keep changing cars, the world will keep turning and turners will probably continue to grow market share steadily.
The stock and the convertible bond look good value to me.
Disc: Convertible bond holder
A PE 0f 11 to 11.8 still implies modest growth. But there isn't that much cash on the balance sheet to play with. And issuing new shares that are 'eps accretive' gets harder and harder the higher the current 'eps' goes. Modest organic growth of 5% or so could happen with high probability (say 70%). Then you might have hyper growth from a brilliant but as yet unannounced acquisition (chance say 10%). Or you could get a triple whammy automotive retail market slowdown due to falling property prices (chance say 20%).
I know that a beagle can only grab one end of the stick in his mouth at a time. But with a Y shaped branch there are three ends. Grabbing one end doesn't make the other two go away.
Convincing yourself that buying a particular share is cheap because everything else is outrageously expensive doesn't wash with me. You can still overpay for a 'cheap' share.Quote:
compared to a market average forward PE of close to 20.
'probably continue to grow market share steadily.' A statement of faith in Turners management? I too am one of the Turners faithful, holding both the bonds and the shares. But just because I hold them doesn't prevent me seeing the other ends of the stick.Quote:
I think much like HBL you have the wrong end of the stick with this one. Population growth will continue with immigration and when cars get to 15 years old they become like a nagging wife, there's usually one problem after another after another...people will keep changing cars, the world will keep turning and Turners will probably continue to grow market share steadily.
The stock and the convertible bond look good value to me.
Disc: Convertible bond holder
SNOOPY
Well my misguided beagle friend its a simple case of you making things too complicated.
I am sure you will be familiar with this hounds modified Ben Garaham formula where I use a no growth PE of 10 for the current super low interest rate environment prevailing and then substitute 1G for Ben Graham's 2G, (because at my heart I hate paying too much for growth and love a bargain).
So how does G shape up ?
4traders lists the following result and expectations for the years ahead
2017 25.1c cps (actual)
2018 29.2 cps (forecast - forecast growth rate 16.3%)
2019 31.4 cps (forecast - forecast growth rate 7.5%)
2020 33.9 cps ( forecast - forecast growth rate 8%)
Average forecast growth rate 10.6%.
There is no two ended stick here my beagle friend, nor a Y shaped three ended stick just a juicy bone and seeing as you already own both the bonds and the shares its evident you already understand that its worth at least a PE of 11.8.
Actually using my own valuation formula it should be accorded a market average PE of 20. Management have to prove up these numbers and projected growth before I'd be looking to lock jaws on a bigger share of the bone but suffice to say I'm very comfortable with my significant sized but low risk stake with the convertible bonds.
You overthink things mate...just like you have with HBL which closed at an all time high today of $1.94.
Used car sales usually follow new car sales,so the article in The Herald is of interest to us.
Headed "NZ new vehicle sales rise 3 per cent in August,heading for annual record".
MIA ceo David Crawford commented;"We have strong net immigration,competitve new vehicle prices,low cost finance and the NZ dollar is relatively strong,we expect these conditions remaining for a while."
TRA shareholders are "well positioned."
Those forecast growth rates are cumulative.
So after three years you can expect a cumulative growth rate of:
1.163 x 1.075 x 1.08 = 1.35
The average growth rate for this period, let's call it 'g' satisfies the equation:
g x g x g =1.35 <=> g^3=1.35 <=> g=1.35^(1/3) => g =10.5%
The Ben Graham formula for stock valuation as originally advocated in 'Security Analysis' was:
V = eps x (8.5+2g) = 25.1 x (8.5 + 0.21) = $2.19
So I take it the 'Beagle' modified version is
V = eps x (10+g) = 25.1 x (10 + 0.105) = $2.54
Still somewhat short of where the share price is today. What am I missing?
Actually I have never bought 'Turners Automotive Group' shares or bonds. I acquired both of them through the TUA takeover. In the process an extremely conservatively financed car auction and retail business has transformed into the highly leveraged finance group you see today. Some people who came on to the share register by the same route I did may feel comforted by the latest name change to 'Turners Automotive Group', thinking the company has gone back to its roots. But they'd be wrong.Quote:
There is no two ended stick here my beagle friend, nor a Y shaped three ended stick just a juicy bone and seeing as you already own both the bonds and the shares its evident you already understand that its worth at least a PE of 11.8.
In the name of Ben Graham going from a PE of 8.5 to 10 and now 20? You are now valuing the share TRA by self created PE inflation?Quote:
Actually using my own valuation formula it should be accorded a market average PE of 20. Management have to prove up these numbers and projected growth before I'd be looking to lock jaws on a bigger share of the bone but suffice to say I'm very comfortable with my significant sized but low risk stake with the convertible bonds.
You overthink things mate...
SNOOPY
g in those formula's Snoopy is expressed as a whole number not a decimal point. i.e. 10.5
To be fair Ben Graham asked what is the sustainable 7-10 year growth rate when estimating g. This is almost impossible to predict with stocks other than those that have very long track records of steady growth like RYM.
See below.
Amended theoretical valuations, corrected as above assuming they can maintain 10.5% growth over the long run which is not necessarily a safe assumption.
I do feel however that the current PE is inconsistent with their growth rate but the market sees this differently so it would appear I am missing something.....
Not adding to this one until they can prove their eps growth.
Happy to rerun the numbers on that basis:
g=10.5%
The Ben Graham formula for stock valuation as originally advocated in 'Security Analysis' was:
V = eps x (8.5+2g) = 25.1 x (8.5 + 2x10.5) = $7.40
So I take it the 'Beagle' modified version is
V = eps x (10+g) = 25.1 x (10 + 10.5) = $5.15
I guess such valuations might be possible with a 10.5% growth rate sustained for 7-10 years. But it would be a brave person to predict that kind of growth going forwards. I would call those valuations brain flushes from a super optimist.
SNOOPY
A PE of 20 for TRA is ridiculous
Methinks 12/13 is about fair, maybe that is even a bit high
To be clear - I think you'd be a brave man to predict 10%+ growth over the next 7-10 years for any company on the NZX with SUM exceptions.
Fact - SP has been in steady decline in recent months as has the bond price.
The market is telling us the vehicle industry has peaked and we're headed down. I hope this isn't right as I have HBL and CMO shares both of which are also heavily dependent on a healthy vehicle market. Won't surprise me if the word "flat" or steady is used at some stage soon by Turners.
I rate TRA higher than the following,and they are my second largest holding after HBL..
AWF pe 18.07....EBO pe 19.88.....FRE pe 19.69....MFT pe 24.21.
Therefore yes a PE of 20 is possible,and may be is not rediculous after all,and they deserve to trade on a PE of twice MPG's pe 10.52....lol...
Mr B, I draw your attention to note 20 in AR2017. There you will find assumptions used to test the value of the goodwill on the books, and the modelled future growth rates. The goodwill on the books from the old 'Turners Auctions','Buy Right Cars' and the 'Autosure' acquisition are all based on the following growth rates:
Growth Forecasts Year2 Year3 Year 4-5 Terminal Rate Turners Group, Buy Right Cars, Autosure 10% 7.5% 5% 2%
If we take the 29.2c forecast for FY2018 and consider that represents a growth rate of 16% over the 25.1c from FY2017, then we can work out a ten year growth picture.
1.16 x 1.1 x 1.075 x 1.05 x 1.05 x 1.02 x 1.02 x 1.02 x1.02 x1.02 = 1.67
The geometric average annual growth rate to achieve that 67% of growth over ten years is:
g^10 = 1.67 <=> g = 1.67^(1/10) = 5.26%
Using the Ben Graham formula for stock valuation as originally advocated in 'Security Analysis':
V = eps x (8.5+2g) = 25.1 x (8.5 + 2x5.26) = $4.77
Using the 'Beagle' modified version we get
V = eps x (10+g) = 25.1 x (10 + 5.26) = $3.83
$3.83 based on forecast earnings of 29.2c gives a forward PE of: 383/29.2 = 13
That is pretty close to the sort of PE figure that Winner was bandying about. Perhaps the thing that the other beagle was 'missing' was nothing more than a more conservative growth rate?
SNOOPY
Thanks mate. All the brokers do that terminal growth estimate with their DCF models because they have no show of accurately predicting the long term growth rate. Whichever way you slice and dice it a forward PE of 11.8 looks good value considering their current and projected growth rate. They need more runs on the board though. Once we have the election out of the way, some positive comments at the annual meeting and if things settle down a bit in Korea, all other things being equal we (at least theoretically) should see this starting to get traction.
I remember buying into WHS quite a few years ago at about $4 after working out that with their expansion strategy in Australia they would be worth $8 per share about five years later. I was quite convinced of my growth figure modelling as I was using my expansion modelling based on experience of how the WHS had been rolling out all over NZ. What could possibly go wrong? The point here is that if you assume even a a modestly low growth rate in the low 10s ( i.e. not too outrageous) and roll it out over just a few years it is very easy to convince yourself that you have bought a 'bargain'.
Postscript to my WHS story is that I sold into the first stake building offer at $5 after about three years, so got away with a modest profit.
I think you have highlighted the issue. Talk is cheap, and Turners in its current incarnation is a very young company. Build 'runs on the board' and a re-rating will come.Quote:
Whichever way you slice and dice it a forward PE of 11.8 looks good value considering their current and projected growth rate. They need more runs on the board though.
SNOOPY
It all comes down to businesses/people doing what they say they will do.
The proof of the pudding, will be there for us to make judgement, of whether we are correct or not, on our eps growth rate, on the 20th.
They will have had 5 and a half months trading,so will have a fair idea what the first 6 months will be like.
Watch for outlook comments.
As much as company executives like to think they are in control of their business, there are always market factors outside of their control. So just because a CEO "does what he/she says he/she will do" does not automatically mean he/she is good. Likewise when a CEO fails their stated targets, that doesn't necessarily mean they are bad. A CEO can mitigate 'market hits' by having a contingency plan. Usually 'money in the bank' is a good contingency plan. But money in the bank can also be used for growth. The problem is money in the bank cannot be used both for growth and as a contingency at the same time. What we as shareholders should be looking at is a CEO with a plan that can change direction, should the market change direction.
Leveraging your financial strength will lead to faster growth. But it will also increase the chance of a fall should broad market forces turn against the sector in which the business operates. If you look at the 'bond covenants' that I have been discussing on the Turners Bonds thread, you will see that I have raised a red flag on leverage. Does this mean that TRA is in any trouble? No. But what if market conditions change and Turners Automotive Group become more stressed? This is a contingency a TRA share or bond investor must consider. Particularly so in a share that does not have the liquidity of a typical 'top 50' share (don't even talk about the liquidity of the bonds!).
The current six months of trading (HY2018) I expect to be strong for profit growth. But you have to remember that these figures will include a six monthly contribution from Autosure (no contribution in the comparable half last year) and six months contribution from 'Buy Right' cars (three months contribution in the comparable half last year). So it won't be an 'apples with apples' comparison.Quote:
The proof of the pudding, will be there for us to make judgement, of whether we are correct or not, on our eps growth rate, on the 20th.
They will have had 5 and a half months trading,so will have a fair idea what the first 6 months will be like.
Watch for outlook comments.
SNOOPY
I been slowly accumulating in these lows, will see how it plays out. I just see things looking good over the next 24 months and the current SP looks very good to me.
Expecting an announcement on 1st quarter dividend any day now....
Mmmm interesting, trading halt and cap raise underway...
Turners Automotive Group Limited (NZX/ASX: TRA) ("Turners", the "Company") has announced a NZ$25 million equity raising through an underwritten placement of new ordinary shares in Turners (“Placement”). Turners has sought a trading halt from the NZX and ASX pending completion of the Placement.
The Placement has been fully underwritten at a fixed price of $3.02 per share.
Good positive move - obviously going to make heaps in next few years
Good bond holders can share in the cheap new ones
Snoops will need to redo his sums now.
https://www.nzx.com/files/attachments/265725.pdf
Please review and comment. (Too busy on client work this morning to review).
Forecast 29m to 31m for FY18.
Last week, on this thread (and in more detail on the Turners bond thread), I raised the issue of Turners looking very stretched from a leverage point of view. Yet this message didn't resonate on this thread, with other shareholders focussed with relentless positivism that future growth will bring. New shares to be issued means that future 'eps' will decline, and the value of existing shares will be eroded. Those that piled in during the latest significant shareholder sell down at the 'bargain' (sic) price of $3.40 will be tending their subsequent market lashings. All I can say is, I tried to warn you. I have previously suggested that those holding the bonds over the shares might be end up being the smart ones. Below is a quote from me in June:
Having said this my own shareholding in TRA is relatively modest, and I do hold a few bonds. I am right behind TRA strengthening their capital base and may look to increase my holding when the smoke from the capital raising clears. I won't be paying $3.40 a share though.
SNOOPY
Huge growth means demands for further capital.
No surprises there.
Confirms TRA's business model is ontrack.
YTD revenue up 14% and profit up 13% on pcp is exceptional.
If you add the acquisitions revenue up 59% and profit up 31% on pcp.
Cannot complain, will apply for some more at 3.02.
Snoops has a point re eps
some 10 million new shares on top of the 74 million already out there is quite a lot
But when everything is calculated on weighted averages it will be all honky dory
and all this new liquidity along with the ASX listing will do wonders to the share price as well
No worries
Does the redemption price of $3.75 for the bonds get adjusted for the new shares?
Lots of questions by Greg from First Capital on this call!
Overall sounds fairly positive, but I must say I wasn't blown away by the update or presentation.
Can someone please crunch the numbers on EPS for FY18 taking into account the new shares issued at the half way point of the year, i.e weighted average EPS this year and calculate this at the mid point of the forecast range and compare to last year's EPS to calculate EPS profit growth forecasted for FY18. Hound is too busy today to chew the fat but would like to know a quick real calculation of estimated EPS growth after last year's (from memory) pretty ordinary 4% ? EPS growth. Shame they had to discount the shares so heavily to get this issue away, suppose that's a product of the current uncertain environment, yesterday's Arivida discount was pretty heavy as well.
Yes Snoops, they are keen for more capital and I for one am pleased to only hold the bonds and not holding out much hope of a premium to the conversion price of $3.75 any more.
It sounds like they are keen for more M&A's which will require additional capital and they said they would likely come back to the market if another opportunity presented itself. They are looking to extend their banking facility with BNZ and are also going to search for another bank to compliment the relationship.
I didn't think they answered the questions that well, especially when the NBR asked why there wasn't a rights issue. I finding Todd a fairly unspiring speaker in general and all they did was read one by one off the slides.
It's a sound business with growth ahead, but it does seem that they've stretched themselves financially with so many aquisitions - albeit this is diversifying their revenue and creating an established model with good organic growth ahead.
I'll still be partcipating in the SPP - but the scale down is going to be huge, considering it's only 5 million.
I much prefer rights issues.
SPPs I loath.
LOL.... that sort of growth does not get the tail wagging much. This capital raise...hmmm, the hounds nose detects something a little fishy. Shares have been in a steady downtrend for a while and some bulls on here reckoned we were looking at 25% growth this year. (cough cough). Will run my own abacus over it when I get time before deciding on SPP. Sorry I'm a bit short on the crypto-coins my furry feline friend :)
Just had a look through the presentation. I guess you either believe the story and buy into it....or you don't and move out of them. For the time being I am in with stock and bonds.
Hope this is not a silly question...
What is the difference between a placement and a share purchase plan (SPP) ?
Is the placement already made to their mates ( for lack of a better way to describe it)....and the SPP an offering that may be scaled to their existing share holders ? Who might their mates be ? (if I have it right)