Hello everyone,
I started investing in TRA last year shortly after the Hugh Green sell out in late June 2017, as I thought it provided a good entry point into what looks like a fundamentally very sound business.
Since then, the share price has been in a gradual downtrend, despite the company posting what appear to be very solid financial results. In particular the FY2018 result in May. +33% net profit, +15% EPS growth. Positive commentary from board and management across all divisions. Positive outlook and increasing dividends. The FY2018 result seemed like the turning point and gave reprieve to the share price as it rose from under $3 to $3.20... alas that was short lived and we're now down even further to 2.63 and trading on a low PE of around 9.
The past few months I've been really scratching my head over why TRA has significantly underperformed the NZX (even before the market recent correction).
After doing a bit of research, I believe this could largely to related to a number of potential headwinds and disruptions to the traditional car dealership business model.
The fundamental way in which people buy and own cars is going to change over the long term.
- The average punter can now go and directly import a second-hand car from sites such as
www.beforward.jp and save on the average 25% mark-up that dealers slap on the imported cars. The only reason you would go to a second-hand car dealer would be if you didn't have the finance and you need to pay it off in installments.
- If we take a queue from overseas, we notice a new trend in car ownership happening. Most brands in the US now offer a 'subscription' based service, where you pay a monthly fee and take any car of your choosing from the yard. The traditional burden of buying, owning, maintaining, insuring etc is taken away from the millennials. This could catch on eventually to the rest of the world.
Mercedes for example:
(
http://www.autonews.com/article/2018...il-dealerships)
- We can also see this in full swing with the first-hand dealers as well. Some car manufacturers are slowly moving towards the Tesla model. You can only buy a Tesla from the Tesla stores. The next big manufacturer that is going in that direction is Toyota. Starting middle of this year, they have revamped the traditional commission-based dealerships.
(
https://www.stuff.co.nz/business/102...-sales-methods)
- The most important disruption of all, is the electric car revolution. At the moment the electric vehicle penetration is less than 1%, but this is set to change rapidly as fuel prices go up. Environmental sentiment echoes louder. More people are becoming more aware of global warming and want to do their bit to reduce greenhouse gas emissions. In some countries, up to 30-40% of the EV's cost is subsidised. The Greens are wanting to bring this to NZ as well to encourage more people to buy first hand EVs:
(
https://www.greens.org.nz/news/press...ment-low-power).
Adding to that, a large number of car manufacturers have indicated they are all committed to having a majority electric fleet only by 2025.
(
https://www.vox.com/energy-and-envir.../ev-revolution)
- The key issues with buying second hand EVs is around the battery. The more an EV is used, the more the battery diminishes over time. The battery in EVs is the most important component.
(
https://www.edmunds.com/car-technolo...and-range.html)
It is currently far more ideal to buy EVs first hand from the manufacturer, in order to get a fresh battery + the 8 year battery warranty.
There doesn't seem to be much point in buying a second hand EV when it costs almost the same first hand if you take the Greens subsidy into account along with the additional risk of a diminished battery and possible lack of the original manufacturer warranty for the battery.
I'm thinking that all these headwinds and disruptions are potentially causing uncertainties around the traditional car dealership model and hence weighing down on the TRA share price. All the tailwinds that used to be with car dealers appear to be slowly fading in a similar way to fossil fuel companies (like Z Energy). For sure the car dealers still have their place today and tomorrow. But it's the day after tomorrow that concerns me.
What you guys think?
Would be great to hear from Turners themselves to see how or if they plan to adapt their business models around each of the points above.
disc: still holding TRA