Capitalised Dividend Valuation Model (FY2018 Perspective)
Quote:
Originally Posted by
Snoopy
Turners Auctions (TUA) + Turners Limited (TNR/TRA) |
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
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 |
(*) 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 'six year average' dividend payout was:
(10.42c + 12.00c + 3.81c + 9c + 12c + 13c)/ 6 = 10.04c (net)
Average Gross Dividend Yield (based on a 28% tax rate) is therefore:
10.04/(1-0.28) = 13.94c
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:
13.94/ 0.075 = $1.86
That makes for sobering reading, when the last price paid in the market on Friday was $3.75!
Turners Auctions (TUA) + Turners Limited (TNR/TRA) |
|
FY2014 |
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Modelled Dividend Paid {A} |
|
$2.131m |
No. Shares on Issue (TNR/TRA) {B} (*) |
|
55.966m |
63.077m |
63.433m |
74.524m |
84.803m |
Normalised Earnings Per Share |
|
6.8c |
19.4c |
24.2c |
22.5c |
25.6c |
Modelled Dividend Paid (cps) {A}/{B} |
|
3.81c |
Actual Dividend Paid (cps) (**) |
|
|
5c + 4c |
6c + 6c |
7c + 3c +3c |
4c + 4.5c +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 'five year average' dividend payout was:
(3.81c + 9c + 12c + 13c +14.5c)/ 5 = 10.46c (net)
Average Gross Dividend Yield (based on a 28% tax rate) is therefore:
10.46/(1-0.28) = 14.53c
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:
14.53c/ 0.075 = $1.94
As previously noted, I no longer believe this valuation method provides a satisfactory technique for valuing Turners Automotive Group. This is because the retained earnings of TRA are employed in growing the business, and this valuation method ignores that contribution. So why do it?
If you were able to pick up some TUA shares at $1.94, this could be justified on a dividend return basis alone. That means any growth that shareholders would get going forwards would come 'for free'. However, I don't fancy my chances of picking up many TRA shares at that price. At today's closing price of $3.05, that means the price you pay for the TRA growth premium is:
$3.05 - $1.94 = $1.11
Is it worth it? That is the next question I will seek to answer.
SNOOPY
Orange Flag 2: FY2018 results
Quote:
Originally Posted by
winner69
By the way the reported EPS of 15% was boosted by having a lower tax rate this year v last year. (Normalised you could say it was less than 10% but does it really matter when nobody knows what the F19 tax rate will be)
The tax rate for DPC/TNR/TRA (I will call it Turners Automotive Group, the new name going forwards) has certainly varied wildly even since FY2015. The first factor in this is that existing tax losses had to be used up. Then there were 'asset sales' to distort the tax take. The 'normal' company tax rate is 28%. However companies tend to pay provisional tax. That means that some tax payments for the current tax year roll over to the next. And when there are significant business changes over the year, the 'catch up' tax can significantly distort tax paid in any particular year. The table below shows the actual tax rate paid by Turners Automotive Group from FY2015 to FY2018.
Actual Tax Paid |
Financial Year |
Tax paid {A} |
Net Profit Before Tax {B} |
Net Profit After Tax {B}-{A) |
Tax rate paid {A}/{B} |
2015 |
$0.956m |
$19.006m |
$18.050m |
5% |
2016 |
$5.949m |
$21.551m |
$15.602m |
28% |
2017 |
$7.057m |
$24.631m |
$17.574m |
29% |
2018 |
$7.773m |
$31.133m |
$23.360m |
25% |
I don't know exactly why the tax rate has dropped for FY2018. But asset sales that are not subject to income tax could be one reason. And once an asset is sold, it cannot be sold again. So including such sales as profits are distortionary for inter year comparatory purposes.
For my own comparisons year to year, I look to take out one off asset sales and foreign exchange gains and losses. I also use a consistent tax rate (usually 28%) and work out the tax that would have been paid had none of those previously mentioned distortions existed.
Snoopy Modelled Tax Paid |
Financial Year |
Tax paid {A} |
Snoopy modelled Net Profit Before Tax {B} |
Snoopy modelled Net Profit After Tax {B}-{A) |
Tax rate paid {A}/{B} |
2015 |
$4.748m |
$16.958m |
$12.210m |
28% |
2016 |
$5.949m |
$21.281m |
$15.332m |
28% |
2017 |
$6.529m |
$23.318m |
$16.789m |
28% |
2018 |
$8.437m |
$30.133m |
$21.696m |
28% |
The fact that declared tax rates vary so much is an 'Orange Flag' to me that means a business is evolving. Thus extreme care is needed when projecting current declared after tax earnings trends into the future.
SNOOPY
Orange Flag 3: FY2018 Perspective
Quote:
Originally Posted by
percy
TRA are big ticket clippers.
Sale of vehicle...……………..Ticket clipped.
Finance of vehicle...………..Ticket clipped
Insurance…………………………Ticket clipped.
Vehicle service...……………..Ticket clipped.
Development of sites...…...Ticket clipped.
MTF non recourse loans.....Ticket clipped
Debt management services,Ticket clipped.
More and bigger tickets to clip.
I agree with Percy's observation, right up until that last line. I sincerely hope it isn't Turners policy to string the buyer along all the way through the car ownership process, clipping the ticket all the way, with the ultimate objective of getting the car back as a failed debt, leaving the owner penniless and jobless (because he can't drive to work)!
Nevertheless I should point out that the strength of this business model is also its weakness:
No Sale of vehicle...…………means...
No Finance of vehicle...……….and...
No Insurance needed…………..and...
No Vehicle service needed...…which means....
Developed Sites become superfluous...(at least these have been sold off to third party landlords, so it is they and not Turners who will suffer) .
also....lower MTF non recourse loans....means a reduced dividend from that source.
What I am saying here is that a very weak car market could see all Turners divisions fall over like dominoes, bar one:
Debt management Services,Ticket clipped.
Turners should at least maximise what they can salvage by chasing their own debtors!
Quote:
Originally Posted by
Snoopy
Turners have not insignificant borrowings. Question: So how is the 'interest rate charged' trend for TNR looking?
|
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Interest Expense (A) |
$7.381m |
$11.436m |
$11.350m |
$14.344m |
Total Liabilities |
$207.970m |
$232.491m |
$384.917m |
$437.662m |
Total Borrowings |
$156.995m |
$174.816m |
$265.889m |
$317.373m |
Averaged Borrowing Balance (B) |
|
$165.906m |
$220.353m |
$291.631m |
Implied Borrowing Interest Rate (A)/(B) |
|
6.9% |
5.2% |
4.9% |
The other issue for Turners going forwards is rising interest rates. It strikes me that 4.9% is unusually low as a borrowing rate for this type of business. If the average borrowing interest rate went up to 6.9%, the sort of rate Turners was paying just two years ago, then the annual interest bill could leap from $14.344m to $20.199m. A near $6m rise in interest charges would hit NPAT by about $4m - ouch!
Note that I am not forecasting that any of this definitely will happen. But I think investors should be aware of these potential risks.
SNOOPY
Capitalised Earnings Valuation: FY2018 Perspective
Quote:
Originally Posted by
Snoopy
I think of Turners as:
1/ Riding a cyclical car market PLUS
2/ Adding an incremental growth premium on top of this.
Valuing 1/ is relatively easy. Valuing 2/ I find much more difficult.
My 'Capitalised Dividend' valuation for this share was a failure. But after some soul searching, I believe that 'capitalising earnings' is a more realistic way to go.
Turners Automotive Group Limited (TNR/TRA) |
|
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Snoopy Normalised Earnings Per Share {A} |
|
19.4c |
24.2c |
22.5c |
25.6c |
Dividend Paid (per share) {B} |
|
9c |
12c |
13c |
14.5c |
Underlying Retained Earnings (per share) {A}-{B} |
|
10.4c |
12.2c |
9.5c |
11.1c |
I favour using at least five years of data when doing an exercise like this. However, when considering a company as fast evolving as Turners Automotive Group there comes a point when historical data used as a proxy for what might happen going forwards becomes positively antiquated. So I have reverted to using just four years of data which covers the period from when TRA was conceived in its current form.
The valuation is in two parts. Once again I am using an acceptable gross return of 7.5% for the dividend part of it.
Average dividend received over the last four years
(9c+12+13c+14.5c) / 4 = 48.5c, divide by four = 12.1c
Gross Capitalised Dividend Component = 12.1c / (0.075 x 0.72) = $2.24 (1)
Average Retained Earnings Valuation reinvested over the last four years
All things going to best plan, retained earnings should be worth more than cash paid as a dividend. But this assumes a largely monotonic increasing profit year in year out, with very few exceptions. I don't believe that the historical underlying profitability data indicates that Turners can achieve this. So I think it wise to assume that a 'dividend in the bank account' is worth more than a 'potential dividend in the bush'. To reflect 'business execution' and 'car market volatility' risks, I am going to increase my required return for 'retained earnings' by two percentage points, out to 9.5%
(10.4 + 12.2 + 9.5 + 11.1)/4 = 10.8c (average)
Gross Capitalised Retained Earnings Component = 10.8c / (0.095 x 0.72) = $1.58 (2)
So my total 'fair valuation' for TRA becomes (1) + (2):
$2.24 + $1.58 = $3.82
Thus at a market price of just over $3, it looks like TRA might be worth accumulating!
SNOOPY