How I normalise TRA profits
Quote:
Originally Posted by
Beagle
Brokers average eps forecast for FY21 is still lower than for FY18. What growth have you manufactured through your convoluted process and are you now in cahoots with Percy lol I stick with a PE of something less than 8.5 due to declining average eps expected over the next 3 years. 8 seems reasonable to me and on 25 cents that makes for an even $2 as fair value.
No convoluted process here Beagle and, just for you, I have added all my references in my post 3984 so that you can see I have not pulled my figures out of a hat. You can take out some of my numbers if you disagree with me, if you consider some of those profits I have taken out as 'normal'. But what is 'normal'?
Turners would say that buying a new site, redeveloping it, then signing up to above market rents to book up front an above market capital profit when the site is on sold to a third party is 'normal business'. I say it is clever business. Good management to become their own 'in house property developer', while having the ability to cart away their container buildings on the back of a truck when they are done. A great way to monetize assets to raise capital to bolster the support for their loan book. But sooner or later they will run out of sites to redevelop. And by 'sooner or later I mean within 2-3 years. What happens to this 'branch' of the business then? While I am happy for Turners to continue to develop their sites in this way, I will only count it as 'normal business' when they start developing sites like this for other third parties. I certainly did not invest in Turners as 'property developers' and so do not count returns from this transient branch of the business as 'normal'.
Now I move to the revaluation of Turners minority shareholding in MTF. Turners do not exercise control over MTF so such equity investments must be 'equity accounted'.. The change in equity value must flow through the profit and loss statement each year, as does the dividend from MTF. I am happy to see the dividend from MTF. I think that the 'dividend income' from the MTF investment is listed under note 7 in the break down of 'Other Income': An amount of $349,000. However the revaluation gain of $612,000 (AR2018 p67) is completely out of the control of TRA. And since their MTF stake is not for sale, I can see little relevance in booking a 'profit' that can never be realised. I realise that it is correct to do so if accounting standards are to be complied with. But I don't think it reflects any change in the earning capacity of the TRA business. So in my assessment this 'capital gain'' should be left out of normalised TRA profits, as should any capital loss if the value of the MTF stake went the other way. Curiously the 'Revaluation Gain on Investments' on p51 of AR2018 is $590,000, not $612,000. I would be interested to hear from anyone who can explain this difference!
Next stop is the reduction in the 'Buy Right Cars' earn out provision. I think it is fair to say that this is one area where management's grand development plan has stumbled. From p49 of HYR2019 we learn that in the pcp "a release of $0.4m was recognised in Profit and Loss" and in the second six months of FY2018 another release to profit and loss of $2.2m was made. Thus the total released to profit and loss from what would have been earn out payments over FY2018 was $2.6m. Try as I might, when I look over the detailed profit and loss statement under note 7 in AR2018, I cannot find these write backs. We know they were booked as profits because Turners told us so in the half year report six months down the track. But where are they in the report at the time? Please let me know readers if you can locate them. In the meantime I will take Turners own word six months later and take that $2.6m off the declared profits. One thing I think we can all agree on is that this $2.6m was a one off windfall (sic) that is unrepresentative of any Turners earnings going out into the future. So looking into the normalised earnings picture, out it must come.
Finally I refer to the EC Credit unredeemed voucher release to P&L, amounting to $0.7m. Turners mentioned this as a significant abnormal (HYR2019 p22), as it was $700,000 less than the equivalent squaring up of the book over FY2017 - actual value $400,000 for the year (AR2018 p13). If you regard the FY2017 year as 'normal' and the FY2018 as 'abnormal', then my normalised adjustment looks appropriate. But truth be told I do not really understand what an 'unredeemed voucher release' is. I have figured out it is debt collection industry jargon, and that it contributes to profits at the EC Credit division. But what is it? And why is it different to normal debt collection profits? If anyone can answer that question, once again I am all ears!
SNOOPY