TRA - Turners Automotive Group [previously TNR - Turners Limited]

[Snoopy]

Hi Snoopy, you do great work, thanks but for the non accountants do you see this company as a hold or buy. I am finding it very hard to find any value in the NZ market.

The ducks do seem to be lining up for TNR Voltage. Year on year statistics are improving and the old TUA business has been absorbed and is being put to good use. As to whether it is a buy or not, well that is the ultimate purpose of all this work. At the moment my financial symphony is unfinished, but I am liking the tunes that I have got so far :-). Of course I may have a slight advantage over you, because I can buy my TNR shares for a capped maximum price of $3 (being a bondholder).

You also should bear in mind that the aggressive acquisition program of TNR is largely being funded by a booming car and equipment market. If this were to suddenly reverse: a whole lot of vehicle loans were to go bad and TNR were forced to sell inventory at below cost to shore up the balance sheet, then the outlook for the company might not be so rosy. Not saying this will happen. Just saying this so that you know where the risks in investing in TNR might lie.

SNOOPY

[blackcap]

Thanks for all the hard work you provide Snoopy. My interest in TNR is probably not big enough to warrant such robust analysis. I do like their business model and think that their acquisitions to date have been very astute. I am often wary of first acquiring for the sake of diversification but to date TNR acquisitions have been EPS accreditive and on very modest PE's.
Ever thought about working as an analyst for one of the broking houses?

[voltage]

Having visited turners recently I notice quite a shift. It is really like a big second hand car yard now where most cars can be purchased immediately. The stock looks like a lot of cheap stuff imported and sold at retail price. Perhaps this is where the market is.

[Snoopy]

All the above information was taken from note 26b-Liquidity Risk in the FY2014 annual report. The equivalent information is not so neatly tabled in the FY2015 annual report. When presentation of results changes from year to year, I immediately become suspicious: What has the company got to hide by changing their result presentation format? The current account information that I seek is still in the FY2015 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$12.339m	AR2015 p32
Financial Receivables Contractual Maturity	$74.174m	AR2015 p53
Reverse Annuity Mortgages	$1.603m	AR2015 Note 16
Total Current Resources	$88.116m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$79.629m+$37.539m	AR2015 p44
Total Current Liabilities	$117.168m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$117.168m - $88.116m = $29.052m

Of course there are ways to make up this shortfall.

1/Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.
2/There is $8.984m of stock on the books at the 'Fleet & Auction' division, that could be sold for cash.
3/ Retaining half (company policy is to pay out half of earnings as dividends) of the profit of $10.050m budgeted for the ensuing year.
4/ If any of the shortfall remained, the difference could be borrowed under the company's banking facilities. However, information on the capacity of spare banking facilities available is not listed in the annual report.

The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other Cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($88.116m+$8.984m+0.5x$18.050m) > 1.1 x $119.459m
=> $106.125m > $131.405m (this is false)

The theoretical shortfall of $27.278m represents:

$27.278m/$142.827m = 17.7% of the end of year loan book balance

In summary, not a good result compared to the strong cash positive position of last year. The contractual cash deficit position of TNR is substantial, greater than the (record) full year profit in FY2015 of $18.05m!

To ensure liquidity over the next twelve months, management has the ability to move resources between divisions. So despite this measure being of primary interest in sizing up financial companies, I believe it is more correct to study the TNR group as a whole. The current account information that I seek is in the FY2016 annual report, but it is scattered. Let's see what happens when I bring it all together again.

Financial Assets	0-12 months	Reference
Cash & Cash Equivalents	$13.810m	AR2016 p26
Financial Receivables Contractual Maturity	$75.735m	AR2016 p46
Reverse Annuity Mortgages	$1.366m	AR2016 p48 Note 16
Total Current Resources	$90.911m	(addition)
Financial Liabilities	0-12 months	Reference
Current Liabilities	$115.679m+$10.984m	AR2016 p37
Total Current Liabilities	$126.663m	(addition)

What we have here is an on paper 'theoretical' current shortfall of:

$126.663m - $90.911m = $35.752m

I say 'theoretical' because I have based this forecasted cashflow deficit on contracted maturity of financial receivables and historically negotiated repayment of bank borrowings. In fact many of these 'contracted receivables' can be rolled over, if a new car is bought on finance to replace the old one (for example). It is also true that the planned repayment of bank borrowings can be renegotiated and retimed. This means that the actual cash deficit will very likely much less than the $35.752m that I have predicted, if it exists at all.

However, if any of the shortfall remained, the difference could be:

1/ Much reduced if most/all of the TNRHA bonds, maturing on 30th September 2016, are rolled over into shares. This would be the equivalent of injecting up to $23.189m (AR2016 Note 24) of new cash into the company, while simultaneously reducing debt by the same amount.
2/ Selling $14.156m in stock from the Turners Fleet/Auction side of the business.
3/ Retaining half the expected earnings over the twelve month period 1st April 2016 to 31st March 2017. This is stated company policy, which based on the last six monthly period would see cash reserves boosted by: 0.5 x $8.162m x 2 = $8.162m.
4/ Increase borrowings from the banks, under variations to the current banking syndicate deal (amount undeclared and unknown, so I will leave this out of my analysis).

The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-

[(Contracted Cash Inflow) + (Other cash Available)] > 1.1 x (Contracted Cash Outflow)

=> ($90.911m+$23.189m+$14.156m+$8.162m) > 1.1 x $126.663m
=> $136.418m > $139.329m (this is false)

The theoretical shortfall of $2.911m represents:

$2.911m/$167.598m = 1.74% of the end of year loan book balance

In summary, not a good result, but rather better than last year. The equation would have worked if it wasn't for the 10% margin required. So a 'fail' against a tough standard, but a close 'fail'.

SNOOPY

[Snoopy]

Having visited turners recently I notice quite a shift. It is really like a big second hand car yard now where most cars can be purchased immediately. The stock looks like a lot of cheap stuff imported and sold at retail price. Perhaps this is where the market is.

All part of the 'retail transformation strategy' Voltage. The old wholesaler, to which the Mum and Dad dealer went to get their stock, is a very secondary part of the business these days.

Thanks for all the hard work you provide Snoopy. My interest in TNR is probably not big enough to warrant such robust analysis. I do like their business model and think that their acquisitions to date have been very astute. I am often wary of first acquiring for the sake of diversification but to date TNR acquisitions have been EPS accreditive and on very modest PE's.
Ever thought about working as an analyst for one of the broking houses?

I don't think they would want me Blackcap. Turners is one of those shares that I don't believe any of the broking houses deems worthy of coverage. 'You and I' are the analysts I'm afraid :-(.

SNOOPY

[percy]

Some work to be done by our own Sharetrader resident Turners analysts....
TNR recently brought a "highly visible" corner site in Wiri for $4.8mil for their fast growing Truck and Machinery business.
Questions;
1/In a couple of years time what will be the "market value" of the site,taking into account Turners will develop the site.
2/Do you think TNR will just book an unrealised profit in their accounts,taking the difference between cost and market valuation.[the market valuation will take into account the tenant is a "national" business],or do you think TNR will sell it and lease it back,and book the development margin ?.
3/If they sell it what will be their profit margin?.[I do not expect they will own the property unencumbered].
4/Do you think when they see how much profit they can make property developing with them as a " national" tenant, we will see them upgrading further sites?

[Snoopy]

Some work to be done by our own Sharetrader resident Turners analysts....

I don't count myself as a property expert, but I'll give this a crack.

TNR recently brought a "highly visible" corner site in Wiri for $4.8mil for their fast growing Truck and Machinery business.
Questions;
1/In a couple of years time what will be the "market value" of the site, taking into account Turners will develop the site.

This site

https://www.google.co.nz/maps/@-37.0...7i13312!8i6656

looks to be the Keith Andrews Misubishi Fuso Site, coveniently next door to the existing Turners Auckland 'Trucks & Machinery' site. It consists of a large expance of tarmacadam and an urban barn, in which to execute the paperwork side of the business - and service vehicles. The value of the site, I would guess be determined by whatever alternative use the site and buildings might be put to. If Turners develop the site, then that development my not suit other alternative uses. So as a general 'rule of thumb', I would guess that development by Turners will not 'add value'. Nevertheless, I do expect the value of the land will track the movement of Auckland industrial land in general.

2/Do you think TNR will just book an unrealised profit in their accounts,taking the difference between cost and market valuation.[the market valuation will take into account the tenant is a "national" business],or do you think TNR will sell it and lease it back,and book the development margin ?.

Turners (old Auctions) do not make their money dealing in property. IIRC they sold off almost all of their properties to reduce debt several years ago. If they retain this property, then yes any increase in value should flow through to the balance sheet at revaluation time. I'm not sure if this would happen every year though. Probably more like every three years?

The other option as you say Percy would be to develop the property, work out how much they are prepared to pay in rent, then draw up a multi year lease agreement and sell the property. Accordingly the property would be valued on the expected cashflows from the lease deal. You could think of that process as 'booking a development margin', if you chose to think of it that way.

3/If they sell it what will be their profit margin?.[I do not expect they will own the property unencumbered].

No Idea, as not an expert in the Auckland industrial property market!

Years ago I remember Restaurant Brands selling off all their properties. At the time they claimed that the increased lease costs would be roughly matched by a reduction in depreciation charges that would have been a cost had they continued to own the properties. Since that time the depreciation tax rules for property has changed, interest rates have reduced, and I expect the price of Auckland industrial land has risen substantially. So I am no longer sure that 'sell and lease back' is a cash neutral decision. Hopefully some of the property gurus who frequent this forum can enlighten us?

4/Do you think when they see how much profit they can make property developing with them as a " national" tenant, we will see them upgrading further sites?

No, because I don't think Turners (old Auctions) still own their sites as a rule.

SNOOPY

[percy]

Smiths City and The Warehouse made a great deal of money developing their own sites.A great deal.
Then setting the rental and on selling the properties.
The value in any property I believe is "the tenant".
In SCY and WHS they were "national" tenants, and so the properties sold at a premium.
Turners will have this option.
Very good use of not a lot of capital.
Just another case of TNRs clipping the ticket.

[Snoopy]

Smiths City and The Warehouse made a great deal of money developing their own sites.A great deal.
Then setting the rental and on selling the properties.
The value in any property I believe is "the tenant".
In SCY and WHS they were "national" tenants, and so the properties sold at a premium.
Turners will have this option.
Very good use of not a lot of capital.
Just another case of TNRs clipping the ticket.

Turners have to operate from somewhere. So buy and develop a new site develop it then sell it on with a cast iron ten year lease contract signed? Yes I agree that Turners could attract a premium if such a package was put out to tender. Time will tell. Nevertheless I think its a oncer, because the rest of those Turners outlets are largely sold already. Ngai Tahu are already doing nicely out of Turner's white shed in Detroit place in Christchurch!

SNOOPY

[percy]

Turners have to operate from somewhere. So buy and develop a new site develop it then sell it on with a cast iron ten year lease contract signed? Yes I agree that Turners could attract a premium if such a package was put out to tender. Time will tell. Nevertheless I think its a oncer, because the rest of those Turners outlets are largely sold already. Ngai Tahu are already doing nicely out of Turner's white shed in Detroit place in Christchurch!

SNOOPY

Whatever they decide to do we must remember they are adding value to the business.
Another ticket to clip,especially when they are looking to upgrade sites/locations .