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

[Snoopy]

The gearing ratio in based on the underlying debt of the company, calculated by stripping out the already contracted future liabilities (from AR2015 Balance Sheet p32) eventually payable to insurance policy holders on the balance sheet. I have additionally removed the deferred revenue ($7.476m) from these underlying liabilities

$207.970m -($9.260m + $16.378m + $7.476m) = $174.850m

Likewise on the asset side of the balance sheet we have to strip the third party 'finance receivables' from the total company assets. From the Balance Sheet.

$328.972m - $142.827mm = $186.145m

Gearing Ratio = Underlying Liabilities/Underlying Assets = $174.850m/$186.145m = 94% > 90%

=> Fail Test

The big spending Turner's acquisition of Oxford Finance (01-04-2014) and the old 'Turners Auctions' (28-10-2014) have greatly increased the gearing ratio of the formerly conservatively geared company!

Turners is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.

The table below has taken items from the balance sheet (marked (1)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces.

	Assets		Liabilities		Shareholder Equity
Finance (Not Underlying)	$94.892m (3)	-	$85.403m (4)	=	$9.489m (6)
Underlying Finance	$167.592m (1)	-	$81.506m (5)	=	$86.090m (6)
Finance Sub Total	$262.488m (*)	-	$166.909m (*)	=	$95.579m (2)
Auctions & Fleet	$99.815m (*)	-	$65.582m (*)	=	$34.223m (2)
Balance Sheet Total (All)	$362.303m (1)	-	$232.491m (1)	=	$129.812m (1)

Calculation (3) allows us to work out the core assets not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:

(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9

From this, we can work out that the Non-Risk Liabilities must be no more than:

(Non-Risk Assets) x 0.9 = $94.892m x 0.9 = $85.403m (which is answer 4 above).

Simple subtraction and addition is then used to work out the rest of the numbers in the table.

So what's the point of this so far?

By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for the Turners Finace division. This is done by looking at the assets and liabilities left outside the core.

Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $81.506m/$167.596m
= 48.6%

Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities? Rather better than the 65.6% that I have calculated for 'Geneva Finance' as it turns out. In practical terms this means that Turners has the capacity to expand their finance business loan book at a greater rate than Geneva, without issuing new capital. Not saying I wouldn't buy Geneva. But on this measure TNR looks better, which is probably why it trades on a higher PE than Geneva.

SNOOPY

[Snoopy]

Updating for the FY2015 financial year.

The profit figure includes a 'write up' in value of $7.058m. This represents the existing pre-takeover TUA stake that was subject to TNR's own takeover. This is a one off self generated event that is not part of normal business 'margin.' So I have removed it from the calculation.

Tax paid over the year was $0.956m. This is less than the statutory rate, because TNR is still using up tax losses.

Margin = NPAT / Revenue

= [($19.006m-$7.058m) - $0.956m] / $89.498m

= 12.3%

That is quite a bit down on FY2014. But due to the transitional nature of what is a transforming business it is not a fair apples with apples comparison.

For a direct comparison with last year, I will look at the 'margin' of the whole business

Margin = NPAT / Revenue

= [($21.551m-$5.949m) - ($0.200+$0.070m)] / $171.195m

= 8.9%

This much lower figure than last year can be largely explained by the normalisation of the tax bill.

Separate to the "Margin' is the special statistic for finance businesses, the 'interest margin'. Turners is very definitely a 'hybrid business'. So to compile the table below I have taken 'Turners Auctions & Fleet' out of the equation.

Interest Margin (Finance business only)

	EOFY2016	EOFY2015	Average
Cash/Cash Equivalents (Part1)	$7.600m	$3.700m	$5.650m
Cash/Cash Equivalents (Part2)	0.5951 x $6.210m	0.5889 x $8.639	$4.392m
Finance Receivables	$165.598mm	$142.827m	$155.213m
Reverse Annuity Mortgage	$9.374mm	$13.253m	$11.494m
Total			$176.749m

Interest Margin = [(Interest Received) - (Interest Expenses)] / [Average Cash Earning assets for Year]
= [$29.631m -0.7179x$11.436m] / $176.749m
= 12.1%

That interest margin is extremely high, more than double that of Heartland and even higher than Geneva Finance. Perhaps one reason it needs to be higher is what happens if a loan goes bad. Selling a second hand car may not get Turners their money back, whereas selling a Reverse Mortgage property , or a herd of cows, means a much better chance of the finance company behind those loans getting their capital back.

SNOOPY

[Snoopy]

	Heartland	Turners (Finance Division)
Loan Book 30-06-2014	$2,607.393m	N/A
Loan Book 31-03-2015	N/A	$142.827m
Loan Book 31-06-2015	$2,862.070m	N/A
Loan Book 31-09-2015	N/A	$164.386m

And here are the results of the calculations....

	Heartland FY2015	Turners Limited 2x1HY2016	Turners Limited (Finance Divisions Only) 2x1HY2016
Share Price	$1.12	$0.28	N/A
Total Shares on Issue	473.674m	630.765m	N/M
Earnings Per Share (annual impairment charge removed)	12.0c	2.3c	N/M
Net Dividend (historical)	3.0c+4.5c	0.6c+0.6c	N/M
Gross Dividend (historical)	10.4c	1.2c (no imputation credits available)	N/M
Gross Yield (historical)	9.3%	4.3%	N/M
PE Ratio (historical)	9.33	12.0	N/A
ROE (averaged equity)	12.2%	12.0%	11.8%
EBIT /(Loan Book {averaged})	7.0%	N/M	12.8%
Minimum Debt Repayment Time (MDRT)	12.2 years	10.6 years
Impaired Loans / Total Loans	0.57%		3.9%
Impaired Loans / Shareholder Equity	3.4%	5.2%	8.3%

Over the last couple of years I have specialised in creating a lot of 'financial information' surrounding 'Turners'. However, although 'interesting' I have decided it is not that useful. The trouble is, a jumble of numbers on its own is just that, a jumble of numbers. What is needed is a cohesive thread to draw it all together, a 'story' if you like. Tell a story and suddenly the numbers have context and an overall meaning.

So here is the 'story' I intend to tell around TNR.

There are three characters in this story,

1/Geneva Finance (GFL),
2/Turners Limited (TNR) and
3/ Heartland Limited (HBL),

listed in terms of decreasing perceived risk. The characters are not equal. But they all operate in the New Zealand finance market. All at one stage took deposits from the public, but only HBL does this now. TNR is 'the one in the middle'.

The first statistic in this story is PE ratio. Investors need to know this, because they need to know how much Mr Market is currently prepared to pay for these companies' earnings. A company with more 'future potential' should command a higher PE ratio. Now, what might 'cause' a higher PE ratio?

ROE (return on shareholder equity) is a measure of how efficiently a company can deliver earnings from a given resource of equity. The higher the ROE, the more efficiently the company is using its capital. Net Interest Margin is another measure of efficiency. But this applies only to financial entities, and that doesn't include the adjunct Turners Limited Auction and Fleet business. A third measure of efficiency is the underlying gearing of the loan book. Put simply every finance company has an underlying shell, upon which is superimposed funds borrowed from a 'parent bank' (and/or depositor and [customers) and 'funds loaned' to customers as 'financial receivables'. With the underlying shell stripped out, investors can get a feel for how far the 'funds loaned' base is leveraged on the 'funds borrowed' base.

There are a couple of ways to present profits in an overexaggerated way. The first is to underestimate the impaired asset position. I look at the declared impaired asset position in relation to the total loan portfolio, including impared assets, to get a feel for this. The second way is to borrow to the hilt on your capital base. My preferred indicator for this is MDRT of 'minimum debt repayment time'. This is a number that answers the question: If all profits were poured back in to repaying debt, how many years would it take to pay off that debt?

To summarize:

1/ P/E ratio measures value.

2/ 'ROE', 'Net Interest Margin', and 'Underlying Gear of Loan Book' are three ways to measure why a higher than average P/E could be justified.

3/ 'Impaired Asset Position' and 'MDRT' are two measures to look at whether the accounts as presented are believable and long term sustainable.

With characters introduced, and the story outline told, it is time for the comparative battle to commence.

SNOOPY

Note: The continuation of this post now has its own thread:

http://www.sharetrader.co.nz/showthr...ners-Heartland

[Snoopy]

To summarize:

1/ P/E ratio measures value.

Note that:

1/ The financial year (FY) ends on 31st March for Turners and Geneva, and 30th June for Heartland.
2/ Geneva results have been adjusted for the recent 7:1 share consolidation.
3/ Turners results have been adjusted for the recent 10:1 share consolidation.
4/ Turners results for FY2015 taxed at 28% (the future rate) for better YOY comparison.

	Normalised Profit	Shares on Issue	eps	Share Price	PE Ratio
Heartland FY2015	$47.55m	469.890m	10.1cps	$1.10	10.9
Heartland FY2016
Turners FY2015	[$19.006m-($0.010+$7.058)m] x 0.72	63.077m	13.6cps	$2.70	19.9
Turners FY2016	$15.517m-($0.200+$0.070)m	63.431m	24.0cps	$3.10	12.9
Geneva FY2015	$2.194m	70.435m	3.1cps	25c	8.0
Geneva FY2016	$3.529m	70.435m	5.0cps	48c	9.6

The table makes it clear that Turners generally trades on a PE ratio higher than Heartland Bank or Geneva Finance. Can such a premium be justified?

SNOOPY

PS: the continuation of this post now has its own thread

http://www.sharetrader.co.nz/showthr...ners-Heartland

[winner69]

Hey Snoops

This a good idea

http://www.sharetrader.co.nz/showthr...211#post632211

[Snoopy]

It does now look as though taking the bonds was the shrewd move. The share price has retreated down to 27c, which implies a conversion price of just 25.5c. 25.5c is only 0.5c above what those who elected to take shares from the offer got. In the meantime bondholders are enjoying a much better income on their capital than shareholders, and still have the option of 'pulling out' at face value if everything turns to custard for TNR over the next year.

Then in another amazing about face by TNR management, the bonds are now listed (ticker TNRHA)! Buyers in there at $1.04,with sellers sitting there at $1.07. That is about a 5% premium to face value should any bond holder want out.

SNOOPY

discl: happy TNRHR 9% bondholder

Please do share views on "The Existing Bonds (NZX:THRHA) To Convert On 30 September 2016".

Etnom, I have transferred my answer to your enquiry onto the 'new' TNR thread, from the old TUA thread (TUA had no bonds). In fact the bonds were created to partly fund the takeover of TUA.

There has been a 10:1 TNR share consolidation since my above referenced post. In the old money, this means the current share price of $3.10 is equivalent to 31c with reference to the above quoted post of mine.

I can't find much fault with the performace of TNR management since the TUA takeover date. In PE terms today I consider TNR at $3.10 neither cheap nor expensive. Of some concern going forwards is the interest rate margin of the finance arm of the business, I calculate as 14% for the year just gone. My concern is that it may be too high to be sustainable! Compare that with the lower 11% margin at smaller and less credit worthy Geneva and you wonder when borrowers from Turners will wake up. However, from a shareholder and bondholder perspective, long may this continue......

I have decided to convert 2/3 of my bonds to shares, to add to my very modest existing shareholding, and cash out the rest. I may seek to purchase more TNR shares on market should the price fall back.

I am also considering the new 6.5% bond offer for the rest of my payout. Two years ago I wouldn't have touched such an offer from a second tier lender like TNR at such a low interest rate. But the way interest rates have gone, maybe 6.5% for two years is attractive? The problem is a second tier lender may not fare so well if market conditions change. So I would want to limit what I put into such a bond as an amount I could afford to lose. Liquidity in the old TNRHA bonds on market was poor. So I think holders of the new bond have to be prepared to be there for the full two years.

SNOOPY

[etnom]

Thanks Snoopy. Your detailed analysis and comments these past few years have been very helpful and taught me how to look at and do the basic maths. Much obliged for your time and patience in sharing.

[RTM]

Hi Snoopy,
Re the new Turner Bonds.
Thanks for your analysis and comments re Turners. Appreciated.
I was wanting some more shares to add to my modest holding, but the price had increased beyond what I wanted to pay for them
So I am considering buying some of the bonds - 6.5% return for two years is not unattractive - and hopefully I either get my money back or better still, they convert to shares in two years time.
Regards
RTM

[blackcap]

Dividend junkies are going to love this.....

TNR
15/09/2016 09:05
DIVIDEND
NOT PRICE SENSITIVE
REL: 0905 HRS Turners Limited

DIVIDEND: TNR: TNR - Dividend Announcement

15 September 2016
Company Announcement

DIVIDEND

The Board of Turners Limited has declared the first quarterly dividend of 3.0
cents per share, fully imputed. The record date will be 23 September 2016,
with a payment date of 30 September 2016.

This is the first fully imputed dividend that Turners Limited has paid as it
is now in a full tax paying position.

CEO Todd Hunter said "We are very pleased to be able to deliver imputed
dividends to our shareholders, and our first quarterly dividend. We have had
a positive start to the FY17 financial year, with the company trading above
budget and well ahead of prior year."

The company announced at the Annual Meeting yesterday that they expect the 6
months profit before tax to be $11.6m, which is 14% ahead of last year's
interim result.

ENDS

[percy]

Yes quarterly fully imputed dividends are most welcome in our household.!
I did find the section "addressing the value gap" in the agm presentation interesting.
I had forgotten that TNR shareprice had underperformed the market for the past year or two.It was brought home to me last night, when I was trying Google Finance charts,rather than Yahoo Finance charts I somehow put in TNR comparing them with HBL and was very surprised.So TNR have a lot of catching up.I am sure now they have put their mind to it they will.
Also the net proceeds from the latest bond issue, will provide them with a healthy [over $24mil] for acquisitions.