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

[blackcap]

Snoopy,

At the AGM, I think I can remember Grant Baker saying (someone questioned them on the RAMS and how they were doing) that the RAMS were something that they were winding down and that this was a leftover from pre-2008. So that is why the total assets may be diminishing yet profit holding? (ie they have not written a new RAM in quite a while)

[percy]

Snoopy,

At the AGM, I think I can remember Grant Baker saying (someone questioned them on the RAMS and how they were doing) that the RAMS were something that they were winding down and that this was a leftover from pre-2008. So that is why the total assets may be diminishing yet profit holding? (ie they have not written a new RAM in quite a while)

Paul Byrnes confirmed this when I spoke to him.
Now I get a bit mixed up here,but DPC's insurance business uses part of the RAMs as capital requirements.The insurance business also writes policies for RAMs,and will continue to offer policies in this area.[very profitable]
DPC see their immediate future in motor vehicle,machinery, equipment finance,and insurance based around these areas.
The TUA acquisition opens up further distribution channels in this area for DPC.

[noodles]

Perhaps that would be easier once the TUA takeover offer closes and the state of the DPC balance sheet post takeover is revealed. Too many variables floating around to give a sensible answer before then IMO.

I am firming up on the idea of taking the DPC 9% bonds myself. That will give the head share a chance to settle down and I can decide whether to join the DPC share register in two years time, when the bonds mature.

SNOOPY

I think the bonds are a decent option. However, you may have to pay up to 30c for your DPC shares in 2 years time versus 25c now. While you would get 9% yield, you wouldn't get the DPC dividend. The lack of liquidity is a bit of an issue for me as well.

I'm thinking of taking half cash and half DPC shares. The TUA acquisition is a game changer.

[blackcap]

I think the bonds are a decent option. However, you may have to pay up to 30c for your DPC shares in 2 years time versus 25c now. While you would get 9% yield, you wouldn't get the DPC dividend. The lack of liquidity is a bit of an issue for me as well.

I'm thinking of taking half cash and half DPC shares. The TUA acquisition is a game changer.

Noodles, the bonds pay 9% which by all accounts is more than the DPC dividend. If the DPC share price is in excess of 30 cents in 2 years time you are well in the money. If not, you still get the DPC shares at a 5% discount to the market value at the time. To me it is a no lose scenario. (sometimes also called win win)

[Snoopy]

What does surprise me is the very low shareholders equity needed to support the assets on the books:

FY2013: $0.059m/$6.628m = 0.89%
FY2014: $0.234m/$5.430m= 4.3%

Anyone offer an explanation as to how they can get away with such thin capitalisation?

OK, I will attempt to answer my own question.

The reverse equity loan (REL) business is very different from other kinds of lending businesses. When people take out a reverse equity loan, they do so retaining ownership of their property. But this isn't how the bank lending them the money sees it. The bank takes the money that they leant on the REL, then turns that 'financial receivable' into an asset on the bank's balance sheet. Our 'owners' loan agreement with the bank means that the bank has effectively taken over the ownership of a substantial part of the property, despite the 'owner' still being listed as 'the person who took out the loan' on the property title.

Even better than this (from the bank's perspective) is that the value of their asset (finance receivable) keeps going up as the interest bill keeps rising. Short of being unable to recover the value of the property when it is finally sold, the bank simply cannot lose on this deal. The bank's asset (finance receivable) can only increase in value over time. So you can run an REL business on hardly any capital because that capital will never be called upon to bail out the loan.

Capital 'never be called upon to bail out the loan'? That sounds too good to be true, and it is. But by limiting the amount of capital loaned on a property to say 50% of its market value (I made that figure up) and using the expected life of the people who took out the loan as a calculation input figure the bank can virtually eliminate the possibility of the loan going bad. Any property slump can be ridden out by just making the residual balance required to be retained by the property owner high enough. You would have to be a very incompetant banker to lose on such a deal.

SNOOPY

[Snoopy]

Snoopy,

At the AGM, I think I can remember Grant Baker saying (someone questioned them on the RAMS and how they were doing) that the RAMS were something that they were winding down and that this was a leftover from pre-2008. So that is why the total assets may be diminishing yet profit holding? (ie they have not written a new RAM in quite a while)

Thanks for this. There was certainly no mention of RAMS being in a wind up mode in the bond offer prospectus. I wonder why they are winding RAMS down though? Return on equity is fantastic:

Return on Equity FY2014: $0.175m/$0.234m = 74.8%

Wow! No wonder the likes of Heartland see their average ROE rising going forwards with the acquisition of the Sentinal REL business!

SNOOPY

[Snoopy]

I think the bonds are a decent option. However, you may have to pay up to 30c for your DPC shares in 2 years time versus 25c now. While you would get 9% yield, you wouldn't get the DPC dividend.

The more people take up the bonds, the higher the debt servicing cost is for DPC. Hence the lower the profit for DPC, and the less likely the DPC share price is to rise. And the more favourable the bond to share conversion price will be in two years time. If you are going for the bonds, apply for all you can I reckon! Milk those DPC shareholders for all you can!

The lack of liquidity is a bit of an issue for me as well.

The bond prospectus sends mixed messages on this point. They state in black and white there is no intention to list the bonds and so holders should be prepared to hold for two years. But then on page 20 there is this statement:

"ii/ The price at which the bondholders are able to sell their bonds is lower than the amount originally paid owing to changes in market interest rates or the perceived credit worthiness of the bonds."

Bondholders holding until maturity will receive the fixed predeclared interest rate of 9%. So the above statement only has meaning if a market for the bonds, prior to maturity, exists.

I think a secondary market for the bonds will emerge, because they are such a desirable investment. I note that DPC don't rule out a secondary market for the bonds, even if they have no plans to set one up. My pick is that once the bonds are issued a secondary market will emerge. The fact that DPC are not being definitive on the bond secondary market is because DPC would rather shareholders accepted shares, not bonds. Don't be scared off the bonds because of perceived liquidity limitations folks.

I'm thinking of taking half cash and half DPC shares. The TUA acquisition is a game changer.

I am leaning towards retaining half of my TUA shares, and converting the other half to DPC bonds. I am waiting on the independent advisors report before I finally decide though.

SNOOPY

[Snoopy]

Paul Byrnes confirmed this when I spoke to him.
Now I get a bit mixed up here,but DPC's insurance business uses part of the RAMs as capital requirements.The insurance business also writes policies for RAMs,and will continue to offer policies in this area.[very profitable]

Yes the insurance side of the business has definitely been regrouped Percy. I would be very pleased to see the reverse equity mortgage business within DPC still alive. But is there any hard evidence of this? It seems strange DPC should separate out the RAMs as a legacy business, then continue to offer RAMs under another umbrella.

SNOOPY

[Snoopy]

Noodles, the bonds pay 9% which by all accounts is more than the DPC dividend. If the DPC share price is in excess of 30 cents in 2 years time you are well in the money. If not, you still get the DPC shares at a 5% discount to the market value at the time. To me it is a no lose scenario. (sometimes also called win win)

Keep in mind the downside protection offered by the bonds too. If DPC has a bad couple of years and the share price goes down to 20c, we bondholders will be buying our DPC shares at only 19c in two years time. Plus we will have had the benefit of 9% paid on our capital in the interim.

I don't predict DPC will get into any real trouble though. Look on page 40 of the bond prospectus.

----

"Nevertheless there are financial covenants on (Dorchester) bank facilities"
<snip>

"The total tangible asset equity ratio shall be greater than or equal to 20% for the period up to 30th September 2015, and 25% thereafter (because they will need more cash on hand to repay bondholders who want out a few months later)."

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This is exactly the kind of capital adequacy test I have been applying to financial companies for years. Those on the Heartland thread thought I was being unrealistic in asking for so much capital to be on the books. Yet here is Dorchester looking to satisfy my requirement without fuss.

Don't get me wrong, I think Heartland is an OK investment. But Heartland is less well capitalised than DPC and IMO has lower growth prospects. Why bother investing in Heartland, when an alternative investment in DPC looks so much better?

SNOOPY

[bunter]

Don't get me wrong, I think Heartland is an OK investment. But Heartland is less well capitalised than DPC and IMO has lower growth prospects. Why bother investing in Heartland, when an alternative investment in DPC looks so much better?

SNOOPY

I'd like know you rate the management of DPC compared to HNZ.

I don't know much about either board - seems HNZ has an ex-senior Westpac exec running it, and, DPC is chaired by a venture capitalist - ex Ecoya, 42 Below, Moa.

Look at how the Ecoya, 42 Below and Moa deals were structured - whose money was at risk?

Whose money is at risk in the DPC bond offer?

There will be another crash some time. They seem to come around every 10 years or so. The last one was in 2008. How would this company do in a crash?

FWIW I sold my TUA on-market at a small discount to the net offer price two weeks ago - for a sure return.