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

[Snoopy]

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.

I wrote the above on 28th September 2013. At the most recent market close the TUA share price last traded at $2.44, up 25%. The last trade price for DPC remains at 22c. So Mr Market has picked up on the relative mispricing of the two shares that existed back then.

Taking the comparison a bit further, I now want to look at the operating profit level. On the TUA thread I recently posted this:

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The return on assets to including the long term financial receivables as well as the current financial receivables (for the period 01-01-2013 to 30-06-2013) was.

($0.907m-$0.409m)x2 / $22.145m = 4.5%

I have removed the insurance commission from the finance division operating profit, and introduced a factor of 2 to 'annualise the return', reflecting the fact that these finance division operating profits were earned over six months.

(Over this six month period the loan book grew 4.2%, and all lending relates to motor vehicles)

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If I do the equivalent calculation for Dorchester based on the six month period 31-03-2013 to 30-09-2013 with new lending by Dorchester 70% on motor vehicles I get:

($1.397m x2) / $34.391m = 8.1%

(Over this six month period the loan book grew from $28.747m to $34.098m, up 18.6%)

This shows that if you remove the capital structure costs away and compare the underlying earning capacity of the vehicle finance business, Dorchester is approximately twice as good as generating EBIT returns as TUA is!

One reason for this could be that the loan book for DPC has a 50% higher value than the loan book for TUA. The more loans you can generate through an established cost base should result in more profit per employee.

OTOH, TUA has no term debt, whereas DPC has a debt ratio of 43% as at 30-09-2013.

SNOOPY

[Snow Leopard]

....This shows that if you remove the capital structure costs away and compare the underlying earning capacity of the vehicle finance business, Dorchester is approximately twice as good as generating EBIT returns as TUA is!...

The figure you calculate for TUA is basically net profit before tax, but after everything else (interest, admin overheads, tea & biscuits, etc) as been accounted for.

The figure for DPC is before interest, tea & biscuits etc (look at the Corporate & Other column to see how much is consumed). [Update: actually looks like biccies are included but interest is not, maybe, it is hard to tell].

So you are not actually comparing tim-tams with anzacs.

Best Wishes
Paper Tiger

[Snoopy]

The figure you calculate for TUA is basically net profit before tax, but after everything else (interest, admin overheads, tea & biscuits, etc) as been accounted for.

The figure for DPC is before interest, tea & biscuits etc (look at the Corporate & Other column to see how much is consumed). [Update: actually looks like biccies are included but interest is not, maybe, it is hard to tell].

So you are not actually comparing tim-tams with anzacs.

'Operating Profit' I regard as synonymous with 'Earnings Before Interest and Tax' (EBIT). However, as PT points out, not all companies see it this way.

So consistent with the philosophy of 'equal biscuits for all' I will have to add the interest charge back onto the TUA 'operating profit'. I shall assume that the interest paid bill related to the finance division is shared in proportion to the segment revenue of all three operational divisions. The calculation to get the apportionment of the TUA interest bill is like this:

$2.580m /($2.580m+$19.961m+$21.191m) =5.9%

I also add back a proportional share of the income tax paid to complete the calculation for an annualised Turners finance division EBIT.

[($0.907m-$0.490m)+0.059x$0.904m+(907/2992)($1.006m)]x2
=[ $0.417m + $0.053m + $0.305m ] x2
= $1.551m

This gives an annualised 'Operating Margin' for TUA finance on an end of year loan book of $22.415m of:

$1.551m / $22.415m = 6.9%

Returning to Dorchester, as PT points out some interest expense has already been deducted from the operating result. But almost all of the company interest bill has been shuffled off to corporate and other. For comparative purposes, I believe it is better to distribute this 'corporate' interest bill among the operational divisions according to revenue. This means the percentage allocation of corporate interest to the DPC finance division is calculated as follows:

$3.167m/($3.167m + $3.237m + $9.121m)= 20.4%

Consequently the annualized 'operating margin' (EBIT) for the largely vehicle finance division of DPC is

([$1.397m+$0.089m+0.204x$2.997m]x2) / $34.391m
= 12.2%

Result: DPC still comes out on top

SNOOPY

[Snoopy]

'Operating Profit' I regard as synonymous with 'Earnings Before Interest and Tax' (EBIT).

<snip>

This gives an annualised 'Operating Margin' for TUA finance on an end of year loan book of $22.415m of:

$0.856m / $22.415m = 3.8%

<snip>

The annualized 'operating margin' (EBIT) for the largely vehicle finance division of DPC is

([$1.397m+$0.089m+0.204x$2.997m]x2) / $34.391m
= 12.2%

Result: DPC still comes out on top

Postscript Thought: DPC Finance having an operating margin higher than TUA Finance does make sense. DPC need a higher margin to pay the interest on their substantial term debt. By contrast TUA Finance is only an add on, a support arm to the core auction business. If TUA can obtain higher auction prices by dint of having a finance arm to support the auction buyer, it must be good for the TUA business overall.

SNOOPY

[Snoopy]

'Operating Profit' I regard as synonymous with 'Earnings Before Interest and Tax' (EBIT).

<snip>

This gives an annualised 'Operating Margin' for TUA finance on an end of year loan book of $22.415m of:

$0.856m / $22.415m = 3.8%

<snip>

The annualized 'operating margin' (EBIT) for the largely vehicle finance division of DPC is

([$1.397m+$0.089m+0.204x$2.997m]x2) / $34.391m
= 12.2%

Result: DPC still comes out on top

Postscript Thought: DPC Finance having an operating margin higher than TUA Finance does make sense. DPC need a higher margin to pay the interest on their substantial term debt. By contrast TUA Finance is only an add on, a support arm to the core auction business. If TUA can obtain higher auction prices by dint of having a finance arm to support the auction buyer, it must be good for the TUA business overall, even if the finance business, segmented on its own, is not that profitable.

SNOOPY

[Snoopy]

As at 30th September 2013, Dorchester owned 5,432,088 shares in Turner's Auctions. In the 30th September 2013 DPC half year accounts , among the assets listed is an 'equity accounted investment' valued at $9.679m. This represents the shares held in Turners Auctions by DPC. Do the division and you will see those shares are valued on the books at:

$9.679m / 5.432m = $1.78 per share.

The majority of this stake was acquired from Milford Asset Management at $1.82. Since that time Dorchester have acquired more shares on market, which is why the average book price is now lower.

There are 493,971,377 Dorchester Pacific shares now on issue. If the TUA share price were to increase by 45c this would create an additional.

5.432m x 0.45 = $2.444m in wealth for DPC shareholders.

Spread over the number of DPC shares on issue, this will increase net DPC asset backing by:

$2.444m / 493.971m = 0.5cps

Of course this has already happened, because with TUA last trading at $2.40, the increase in share price has been book value has been 62cps. This means NTA of DPC has increased by 0.7cps since the 30th September balance date.

None of this is really enough to affect the fortunes of DPC going forwards IMO, even if it is nice to have a bit more 'capital in the bank' than you think.

SNOOPY

[Valuegrowth]

During last couple of years some finance companies went into receiver ships due to global financial crisis. Still DPC is continuing their business. How do you think about financial companies as a general in New Zealand? In the fast I had some shares of Dominion Finance bought them on the basis of broker research. When it went into receiverships I had few shares.

I don’t blame anybody because in the investment world there are risks and returns. Beside it we cannot win all the times. Moreover in some period some industries can struggle due to some types of crisis globally.

[Snoopy]

During last couple of years some finance companies went into receiver ships due to global financial crisis. Still DPC is continuing their business. How do you think about financial companies as a general in New Zealand?

I think there will always be a need for finance companies in New Zealand. But I also believe, as investors, we should be extra careful with due diligence before we buy shares in finance companies. DPC is only in business because a group of new investors got behind the company with an offer for more capital. And because existing shareholders and deposit holders agreed on a moratorium while the existing business was sorted out. DPC came very close to not being in business in sympathy with the majority of finance companies that collapsed.

Going forwards we have a new DPC, better capitalized and better focused.

In the past I had some shares of Dominion Finance bought them on the basis of broker research. When it went into receivership I had few shares.

I don’t blame anybody because in the investment world there are risks and returns. Beside it we cannot win all the time. Moreover in some period some industries can struggle due to some types of crisis globally.

Sorry to hear about your Dominion Finance loss. But if it helps you understand the potential weaknesses in finance companies you may have learned a worthwhile if costly lesson.

DPC has a very high return on its asset base. But it probably needs it. Motor vehicles depreciate. Repossessing a car does not mean a finance company will get their money back on that car if it is resold. Repossessing a house you are much more likely to get your loan capital back, even though in general the profit margins are not as great.

SNOOPY

[Valuegrowth]

Thank you snoopy. I really appreciate. As I said before we cannot win all the times due to so many factors. I consider loss making as part of my investment process. Actually I am ready to make some looses now if I find great investment opportunities depend on the situation. Because not only we can recover our losses but also we can outperform the market. However after years of experience I have my own successful strategy to pick winning stocks now. I believe New Zealand market could have long term investment opportunities especially during next two decades. Kind regards MW.

[percy]

During last couple of years some finance companies went into receiver ships due to global financial crisis. Still DPC is continuing their business. How do you think about financial companies as a general in New Zealand? In the fast I had some shares of Dominion Finance bought them on the basis of broker research. When it went into receiverships I had few shares.

I don’t blame anybody because in the investment world there are risks and returns. Beside it we cannot win all the times. Moreover in some period some industries can struggle due to some types of crisis globally.

I was very lucky to make very good money with Dominion Finance shares.The prospectus was excellent.Years of solid growth.
Ended up it was all lies.I was lucky to sell as I needed the money to help a friend out,at the time.
Today there are more regulations, maybe a lot safer,however it pays to be careful.