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

[Snoopy]

OK so according to the 30th August 2013 announcement, there are now 479,342,632 ordinary DPC shares on issue. After tax profit of $6m for FY ended 31-03-2014 rising to $10m for FY ended 31-03-2015.

"That balance sheet will have the capacity to debt fund significant, but not all of the investment in acquisitions we would hope to make. However, we are conscious of
further dilution for all shareholders and our modelling shows relatively modest further capital raising involving the issue of less than 100 million additional shares."

Slight sting from the CEO's AGM address. 100m more shares coming!

SNOOPY

[Snoopy]

Time to bring together my investigation into the 'financial factors' that sit behind Dorchester.

Leaving aside the suggestion that the term Tier 1 and Tier 2 capital strictly apply only to banks, however you measure things Dorchester was short of capital last year. Management themselves recognized this and post the 31st March balance date there has been a significant injection of equity into the business. And at the same time the somewhat cloudy financial structure of the company was cleared up. I would argue now that even if you regard all capital contained within DPC as 'tier2', capitalization is now more than adequate by any standard. The reason for this is that DPC has an 'acquisition strategy' going forwards. The plan as the CEO has laid out in the budget is to grow organically although he does note in the AGM address to shareholders:

"debt purchase in both markets (NZ/Oz) does present a step out opportunity. We will take a conservative approach to debt purchase. We will not be relying on contributions from this activity to achieve budgeted profits nor will we carry costs in anticipation of securing any debt purchase."

That means the opportunity for a step up in budgeted earnings is there if there are debt ledgers out there at the right price.

As a result of the capital raising the gearing ratio of the underlying business is very conservative (I calculate 33.7%).

The main 'thorn in the ointment' for FY2012 was underlying earnings which were negative (-$0.133m). If nothing else the recapitalized company should see the interest bill drop from last years $2.55m. Underlying borrowings after the capital restructuring is complete were forecast as $13.9m, down from $22.784m as at 31st March 2013 (balance date). That interest adjustment alone should see the company move back into the black.

Profit forecast for the year ended March 2014 is $6m, with probably 80% of that figure coming from business development and 20% from a reduction in underlying debt. That represents an ROE of:

$6m/ $67.4m = 8.9% or $6m/ ($67.4m-$26.2m) = 14.6% if you take out projected intangible assets at the time of the recapitalization. I am not sure which is the most appropriate figure of the two to use. Any views?

Business is projected to increase in FY2015 where a $10.5m profit is budgeted for. Dorchester operates in a competitive market, and the individual gains in contribution from which which division are 'blacked out' in the CEOs 'Profit Forecast with Organic Growth and M&A' slide. Essentially the message is 'trust us, we know what we are doing'. From what has been revealed the business plan looks sound and achievable. Net tangible asst backing though is only

($67.4m-$26.2m)/479.342m = 8.6cps

So at 22cps market price today you are paying a significant asset premium for management expertise. Projected dividend yield will only be 40% of gross profit, and there will be no imputation credits due to previous years losses. $6m projected profit spread around 479.342m shares is 1.3cps. While a projected 0.5cps dividend is welcome, the gross dividend yield with the share price at 22c is only 2.3%. IMO the current share price cannot be justified on projected dividend yield alone.

With earnings projected to jump to $10.5m in FY2015 that dividend yield jumps to 4%. I would say at 22c the market has already priced in further growth above that. Whether you think investing at 22c is justified will depend on just how lucrative you think the longer term growth strategy will be. I don't see any hurry to buy into this company at 22c. But I will be putting DPC on my watch and wait list.

SNOOPY

[zigzag]

Time to bring together my investigation into the 'financial factors' that sit behind Dorchester.

Leaving aside the suggestion that the term Tier 1 and Tier 2 capital strictly apply only to banks, however you measure things Dorchester was short of capital last year. Management themselves recognized this and post the 31st March balance date there has been a significant injection of equity into the business. And at the same time the somewhat cloudy financial structure of the company was cleared up. I would argue now that even if you regard all capital contained within DPC as 'tier2' capitalization is now more than adequate by any standard. The reason for this is that DPC has an 'acquisition strategy' going forwards. The plan as the CEO has laid out in the budget is to grow organically although he does note in the AGM address to shareholders:

"debt purchase in both markets (NZ/Oz) does present a step out opportunity. We will take a conservative approach to debt purchase. We will not be relying on contributions from this activity to achieve budgeted profits nor will we carry costs in anticipation of securing any debt purchase."

That means the opportunity for a step up in budgeted earnings is there if there are debt ledgers out there at the right price.

As a result of the capital raising the gearing ratio of the underlying business is very conservative (I calculate 33.7%).

The main 'thorn in the ointment' for FY2012 was underlying earnings which were negative. If nothing else the recapitalized company should see the interest bill drop from last years $2.55m. Underlying borrowings after the capital restructuring is complete were forecast as $13.9m, down from $22.784m as at 31st March 2013 (balance date).

Thanks for the summary Snoops. Now maybe someone could find your leed, a little plastic bag, and take you for a long W.A.L.K.

[Snoopy]

But I will be putting DPC on my watch and wait list.

My above analysis of DPC is largely based on the post fund raising balance sheet of DPC as outlined in the pro-forma balance sheet slide presented to shareholders at the AGM on 23rd August 2013. However, to an extent this is a moot observation because the Chairman has clearly signalled that DPC is on the acquisition trail.

From the Chairman's AGM address:
"While there will be a range of views on what gearing or equity ratio is appropriate for a financial services company such as Dorchester, the Boards’ view is that there is some $50m of borrowing capacity to fund merger and acquisition opportunities."

Simple subtraction from the $67.4m of shareholder equity on the pro-forma balance sheet leaves $17.4m. I interpret that to mean that $17.4m is sufficient equity to 'cover' the existing working assets of the company comprising:

Finance Receivables of $31.4m, Reverse annuity mortgages of $17.7m, Financial assets including Funds Under management of $16.8m. These total financial working assets, that are ultimately owned by other parties not DPC add up to $65.9m.

$17.4m/$65.9m = 26.4%

This is in accordance with the >20% 'Tier 1' capital standard imposed by UBS and First NZ Capital on PGGW Finance, before PGGW finance amalgamated with Heartland bank.

Of course if you subtract out the $26.2m of intangible assets on the books then DPC would be in net negative shareholder asset position. I guess that is a strong argument to show that it is not appropriate to strip out intangible assets in this situation?

SNOOPY

[Snoopy]

Thanks for the summary Snoops. Now maybe someone could find your leed, a little plastic bag, and take you for a long W.A.L.K.

No such luck zigzag. Sitting on top of my dog kennel typing sounds much more entertaining. Of course if you want to write up your own story around Dorchester please share. Perhaps my summary is just a compostable version of 't-h-i-s' after all?

SNOOPY

[Snoopy]

Profit forecast for the year ended March 2014 is $6m, with probably 80% of that figure coming from business development and 20% from a reduction in underlying debt. That represents an ROE of:

$6m/ $67.4m = 8.9% or $6m/ ($67.4m-$26.2m) = 14.6% if you take out projected intangible assets at the time of the recapitalization. I am not sure which is the most appropriate figure of the two to use. Any views?

Business is projected to increase in FY2015 where a $10.5m profit is budgeted for.

Having just done the finance division margin calculation for TUA, I thought it was an interesting comparison to bring across to the Dorchester thread. Notwithstanding the fact that Dorchester owns nearly 20% of TUA, I think the comparison is interesting given Dorchester's already large existing exposure to motor vehicle loans.

As calculated for Turner's Auctions
"Operating margin at 1HY2009 was $0.107/$1.946 = 5.5%. Fast forward to 1HY2013 and operating margin was $0.907m/$2.668m= 34.0%"

That 34% margin is a stunning figure and compares more than favourably with Dorchesters own projected margin for the year ended March 2014 of 14.9% (best interpretation). If we take a rather optimistic projection and say the $10.5m that Dorchester predicts for FY2015 is on the same amount of revenue as FY2014, then the projected operating margin for Dorchester for FY2015 becomes:

$10.5m / ($67.4- $27.2)m = 26.1%

That is still significantly below the margins that Turners Auctions are getting right now. Perhaps it is Turners who will be teaching the finance lesson to Dorchester, and not the other way around?

SNOOPY

[Snoopy]

As calculated for Turner's Auctions
"Operating margin at 1HY2009 was $0.107/$1.946 = 5.5%. Fast forward to 1HY2013 and operating margin was $0.907m/$2.668m= 34.0%"

That 34% margin is a stunning figure and compares more than favourably with Dorchesters own projected margin for the year ended March 2014 of 14.9% (best interpretation). If we take a rather optimistic projection and say the $10.5m that Dorchester predicts for FY2015 is on the same amount of revenue as FY2014, then the projected operating margin for Dorchester for FY2015 becomes:

$10.5m / ($67.4- $27.2)m = 26.1%

That is still significantly below the margins that Turners Auctions are getting right now. Perhaps it is Turners who will be teaching the finance lesson to Dorchester, and not the other way around?

The number of shares on issue in DPC is changing rapidly. The Business Bakery SSH announcement on 30th August 2013 indicates 480m shares were on issue then.

The projected FY2015 NPAT of $10.5m spread over 480m shares equates to eps of 2.2cps. At 22c that puts DPC on a projected PE of 10, still 18 months away. The PE for FY2014 (YE 31-03-2014) is around 16 (based on 6.5c eps)

Meanwhile my comparative share TUA is looking to earn near to 15cps for FY2013. At a share price of $1.95 that is a PE of 13. With TUA apparently having the better business model and being cheaper, I can't see any reason to swap over some of my 'overweight' position in TUA into DPC, while DPC is trading at 22c. Perhaps if the DPC price were to drop below 20c I might start to get interested.

SNOOPY

[biker]

All quiet at DPC, and has been for a while now. I see this as a potential growth Company with good medium term prospects.
Some good backers and management and I'm counting on some of the work no doubt going on in the background at the moment coming to fruition before Christmas or early next year. Speculation only on my part but with a projected PE of 10 for the 2015 year and deals to be done in the meantime I see upside potential.
The only cloud is a possible grab for more capital, but I would hope to see a few more runs on the board before that happens.

Disc. Hold quite a few so I'm biased, but buying more of these at 22c.

[biker]

A bit of depth building up on the bid side?

[zigzag]

A bit of depth building up on the bid side?

Their half-year should be out in a few weeks. Perhaps some interest building ahead of this.