TUA - Turners Auctions. A Case Study.

[noodles]

Not sure who 'they' are. But DPC currently doesn't pay tax because they are using up tax losses. TUA has just paid a special dividend to wipe out their tax credits. So AFAICT any tax credits going forwards will have to be earned. Currently Dorchester/Turners have none.

SNOOPY

I was referring to DPC.
I meant tax losses.

[Snoopy]

Back of envelop stuff... please critique.

DPC shares outstanding 494 million
extra shares $30m/.25 = 120 million.

Shares issued 614 million.

Close enough. Paul Byrnes has declared the $30m capital raising closed early (stock exchange announcement 24th October).

But he has also said.

"We will still be able to accommodate remaining takeover acceptances, arising from the extended offer and any compulsory acquisition, by issuing additional shares”.

So there may end up being a few more shares on iisue than that.

Profit forecast $25 million if 100% takeover of Turners.

Don't know where that $25m profit figure comes from. p24 of the Independent Valuation document sent out to TUA shareholders states:

"Dorchester estimates net profit before tax <snip> rising to $15m, for the year ended 31 March 2016 (excluding the impact of the takeover offer for Turners)."

31-03-2016 seems a long way away. But Turner's FY2014 report covers the period up to 31-12-2014. So the 31-03-2016 yearis only a one year (actually 15 month) increment on this December's TUA result. I am assuming that TUA will grow their NPAT result by 5% over that 15 months. I will normalize the Dorchester operating result for tax because they should be paying it by about then.

NPAT = ($15m x 0.72) + ($2.269m + $2.647m)(1.05) = $16.0m

But that figure does not include the extra interest bill due to:
1/ Issuing the Dorchester Bonds
2/ Interest needed on the net borrowed capital needed to pay out TUA shareholders in cash.

I am assuming a full takeover of TUA and that cash bonds and shares are issued in the proportions declared on the 17th October press release: Cash 49%, DPC shares 24%, DPC bonds 27%. So we can have a good stab at what this incremental interest bill might be:

Takeover Price = $3 x 27.375m shares x (1-0.198) = $65.864m to pay out in some form.

Using the percentage numbers above I get the breakdown in payout as follows:

Cash: $32.273m
DPC shares: $15.807m
DPC bonds: $17.783m

The DPC bonds will generate an annual interest liability for DPC of:

0.09 x $17.783m = $1.6m

The net cash payout (offset against the new equity) is:

$32.273m - $15.807m = $16.466m

Assuming a bank interest rate of 8%, this increase in debt will generate an annual interest bill of :

0.08 x $16.466m = $1.3m

So adjusting the combined group NPAT for their new incermental interest bill:

$16.0m - 0.72($1.6m+$1.3m) = $13.9m

Now work out the earnings per share:

$13.9m/614m = 2.27cps.

At a share price of 25c, that means DPC is trading on a projected PE for FY2016 of:

25c/2.27c = 11.0

On a PE of 12 we might expect a share price of:

2.27c x 12 = 27.2c

To me the 25c share price today looks fair, assuming the TUA integration goes to plan and earnings growth forecasts are accurate. Considering there is still some water to go under the bridge by 31st March 2016, DPC at 25c hardly looks a bargain though.

I still believe I will get a better overall return holding Dorchester bonds rather than Dorchester shares over the next two years.

SNOOPY

[noodles]

Don't know where that $25m profit figure comes from.

https://www.nzx.com/companies/DPC/announcements/253161

"If the takeover proceeds we would expect the Dorchester group profit before tax in the 2016 year to be in the $20 million to $25 million range, depending on our ultimate shareholding in Turners”, said Mr Byrnes."

[noodles]

31-03-2016 seems a long way away. But Turner's FY2014 report covers the period up to 31-12-2014. So the 31-03-2016 yearis only a one year (actually 15 month) increment on this December's TUA result. I am assuming that TUA willgrow their NPAT result by 5% over that 15 months. I will normalize the Dorchester operating result for tax because they shoudl be paying it by about then.

NPAT = ($15m x 0.72) + ($2.269m + $2.647m)(1.05) = $16.0m

But that figure does not include the extra interest bill due to:
1/ Issuing the Dorchester Bonds
2/ Interest needed on the net borrowed capital needed to pay out TUA shareholders in cash.

Assuming a full takeover of TUA and that cash bonds and shares are issued in the proportions declared on the 17th October press release: Cash 49%, DPC shares 24%, DPC bonds 27%. We can have a good stab at what this incremental interest bill might be:


SNOOPY

You have missed 2 major items that will positively impact on profit as a result of the takeover:
1.insurance and finance margins won't go to a third party like MTF
2. Listing and back office costs for TUA.

Paul Bynes said he has found 12 different cost savings initiatives at the recent AGM

This is how he gets to NPBT of $25mill

[Snoopy]

You have missed 2 major items that will positively impact on profit as a result of the takeover:
1.insurance and finance margins won't go to a third party like MTF
2. Listing and back office costs for TUA.

Paul Bynes said he has found 12 different cost savings initiatives at the recent AGM

This is how he gets to NPBT of $25mill

Accepting your quote of NPBT of $20m-$25m that equates to NPAT of $14.4m to $18m. The lower figure is not too different to my $13.9m.

I am not sure how many back office costs can be saved as the finance division at TUA is already a lean operation. I take your point about not giving upmargins to MTA for finance and insurance. I hope DPC can improve things. But that $25m figure being posted around is at the outer level of optimism.

SNOOPY

[noodles]

But that $25m figure being posted around is at the outer level of optimism.
SNOOPY

Or perhaps conservatism. On the face of it, the $25mill seems aggessive. But it is rare for a forecast to be made so far out in the future. Perhaps they have enough visibility now to make such a call.

Since Paul Byrnes and the Business Bakery took over, we have seen stella growth and they have exceeded forecasts.

Time will tell.

Note:The lower level ($20mill) assumes only 50% ownership of TUA. The upper level $25mill assumes 100%.

[Snoopy]

Or perhaps conservatism. On the face of it, the $25mill seems aggessive. But it is rare for a forecast to be made so far out in the future. Perhaps they have enough visibility now to make such a call.

I see the forecast goes all the way back to 28th July 2014, if it was genuinely made in that press release.

Since Paul Byrnes and the Business Bakery took over, we have seen stella growth and they have exceeded forecasts.

Time will tell.

Note:The lower level ($20mill) assumes only 50% ownership of TUA. The upper level $25mill assumes 100%.

I see the $20m and $25m NPBT figures in the press release. I don't see that $20m refers to a 50.1% holding and $25m refers to a 100% holding though. Given the cost of borrowings, it might be that $20m refers to a 100% TUA holding and $25m refers to a 50% holding.

back further in the same press release Byrnes says:

--------

Dorchester CEO and Executive Director, Paul Byrnes, said funding for the acquisition will be a combination of a share placement, the issue of Convertible Notes and some bank funding.

“We anticipate raising between $25 million and $27.5 million at $0.25 per share through the issue of Dorchester shares to Turners shareholders, including Bartel, and a placement. We also expect to issue around $15 million of Convertible Notes including to Bartel. Final numbers will of course depend on the level of acceptances and the combination of shares, Convertible Notes and cash options taken up by Turners shareholders."

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It doesn't seem credible that Byrnes was forecasting almost the same amount of fund raising depending on whether DPC gets to 50.1% or 100%. The takeover offer was mean to TUA shareholders IMO. I don't think Byrnes expected it to get to 90% back on 28th July.

Byrnes is issuing more DPC shares ($30m worth) and DPC bonds ($18m worth) than forecast. He must also be taking on a lot more bank debt than forecast to make up the whole price difference too. Because of this, I doubt that $20m to $25m FY2016 NPBT forecast made back in July 2014 for FY2016 is up to date.

SNOOPY

[blackcap]

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It doesn't seem credible that Byrnes was forecasting almost the same amount of fund raising depending on whether DPC gets to 50.1% or 100%. The takeover offer was mean to TUA shareholders IMO. I don't think Byrnes expected it to get to 90% back on 28th July.

Byres is issuing more DPC shares ($30m worth) and DPC bonds ($18m worth) than forecast. He must also be taking on a lot more bank debt than forecast to make up the whole price difference too. Because of this, I doubt that $20m to $25m FY2016 NPBT forecast made back in July 2014 for FY2016 is up to date.

SNOOPY

Snoopy, I happened to speak with both Paul and Grant Baker at the AGM where Grant stated they would prefer 100% of TUA and Paul re-iterated that the $25m profit was for a 100% acquisition of TUA. I also questioned Grant on the disparity of the two following statements... (you would think that if FY 15 was ahead by $.5-$1.5m then so would FY 16)

(i) Net Profit Before Tax for the year to 31 March 2015 is forecast at $11.5
million, ahead of the previous guidance of $10 - $11 million

(ii) Net profit Before Tax for the year to 31 March 2016 is forecast at $15
million, in line with previous guidance

He suggested that the profit for FY16 would be higher as well but that they did not announce that to market as they were being conservative.

He seemed to indicate that the flow on from FY 15 would follow through to FY 16. This mainly excludes TUA as the FY15 forecast is assuming 18 odd % of TUA. I think they may surprise on the upside all other things being equal.

[noodles]

I doubt that $20m to $25m FY2016 NPBT forecast made back in July 2014 for FY2016 is up to date.

SNOOPY

If it is not up to date, management should have updated the market. Given they have just raised $30Mil from retail and institutional investors, they are legally obliged to ensure continuous disclosure.

[Snoopy]

Snoopy, I happened to speak with both Paul and Grant Baker at the AGM where Grant stated they would prefer 100% of TUA and Paul re-iterated that the $25m profit was for a 100% acquisition of TUA. I also questioned Grant on the disparity of the two following statements... (you would think that if FY 15 was ahead by $.5-$1.5m then so would FY 16)

(i) Net Profit Before Tax for the year to 31 March 2015 is forecast at $11.5
million, ahead of the previous guidance of $10 - $11 million

(ii) Net profit Before Tax for the year to 31 March 2016 is forecast at $15
million, in line with previous guidance

He suggested that the profit for FY16 would be higher as well but that they did not announce that to market as they were being conservative.

He seemed to indicate that the flow on from FY 15 would follow through to FY 16. This mainly excludes TUA as the FY15 forecast is assuming 18 odd % of TUA. I think they may surprise on the upside all other things being equal.

Thanks for this clarification from management Blackcap. The thing that bothers me about this forecast is this.

Based on the two latest half year results for TUA, the annualised profit is:

$2.269m + $2.647m= $4.916m (NPAT)

So annualised NPBT for TUA = $4.916m/0.72 = $6.827m

80% of that figure is: 0.8 x $6.827m= $5.462m.

That 80% is the incremental gain in profit, once the 80% of TUA that DPC didn't own before the takeover is brought in house.

Add this to the $15m for FY2016 that is the DPC forecast for all other parts of Dorchester ("excluding the impact of the takeover offer of Turners" from p24 of the Grant Samuel Evaluation) and I get a forecast NPBT for FY2016 of:

$15m + $5.462m = $20.462m

To make the NPBT $25m upper profit forecast figure post merger, the Turner's profit would have to increase by:

$25m -$20.462m = $4.538m in just 18 months. That would mean the contribution from the Turners profit for the DPC year ended 31st March 2016 would be:

$6.827m + $4.538m = $11.365m

That is an increase in TUA NPBT of: $4.538m/$11.365= 40% (!)

I would be seriously hacked off if TUA directors were projecting that kind of profit increase so soon, yet agreed to sell out to DPC so cheaply.

SNOOPY